If a profit-maximizing perfectly competitive firm does not have to compensate society for a negative externality, the firm will choose to produce where
A) price equals marginal cost.
B) price equals marginal social cost.
C) marginal cost equals marginal social cost.
D) marginal revenue equals marginal social cost.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, a profit-maximizing firm will produce at the point where price equals marginal cost (P = MC), ignoring any externalities unless required by regulation to do otherwise. This is because, in perfect competition, firms are price takers and can sell as much as they want at the market price, so they will produce up to the point where the cost of producing one more unit (marginal cost) equals the price they receive for that unit. Externalities, whether positive or negative, are not considered in this decision unless there are regulations or costs imposed on the firm for those externalities.

If a Profit-Maximizing Perfectly Competitive Firm Does Not Have to Compensate