Question

When the marginal social cost of a good exceeds its marginal private cost,

a. Too many units will be produced by the market

b. The market price will be too high

c. It is an example of a beneficial externality

d. Too few resources will be allocated to its production

Answer 1

when the marginal social cost of a good exceeds the marginal private cost too many units of the good will be produced by the market.

At a higher marginal cost, the price will be higher and quantity demanded and supplied will be equal at this lower price. This equilibrium point will be to the right of the optimal equilibrium point. Thus the quantity produced will be high.

The the optimal equilibrium point is very marginal social cost equals the marginal social benefit.