A negative externality (that has not been internalized) causes the
A) optimal quantity to exceed the equilibrium quantity.
B) equilibrium quantity to be either above or below the optimal quantity.
C) equilibrium quantity to equal the optimal quantity.
D) equilibrium quantity to exceed the optimal quantity.

Question

Quizplus · Accepted Answer

A negative externality results in a market failure, where the cost to society of producing a good or service is greater than the cost the producer pays. This causes the equilibrium quantity to be higher than the optimal quantity, as the negative externality is not being factored into the production decision. Therefore, choice D is the correct answer.

A Negative Externality (That Has Not Been Internalized) Causes the