Question

Since air pollution creates a negative externality: Select one: a. social welfare will be enhanced when...

Since air pollution creates a negative externality:

Select one: a. social welfare will be enhanced when some, but not all air pollution is eliminated

b. social welfare is optimal when all air pollution is eliminated

c. governments should encourage private organisations to consider only private costs

d. the free market result maximises social welfare

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Answer #1

Since Air pollution creates a negative externality, social marginal cost will exceed private marginal cost. To internalize the externality, Government should encourage private organisations to consider social costs. If the firms produce at socially efficient equilibrium (where marginal social cost equals the marginal social benefit) rather than at free market, social welfare will be maximized. Social welfare is optimal when all air pollution is eliminated and MSC = MSB.

Answer: option B

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