If we know that the supply curve for good x fails to reflect the total cost to society of producing that good, then we know that
A)the market for good x is characterized by an externality, but we cannot determine whether the externality is positive or negative from this fact alone.
B)the market for good x is characterized by a positive externality.
C)the market for good x is characterized by a negative externality.
D)the demand curve for good x fails to reflect the value to society of that good.

Question

Quizplus · Accepted Answer

If the supply curve fails to reflect the total cost to society, this means that there is an externality present in the market for good x. Since the cost is not reflected in the supply curve, this means that the cost is being borne by someone else. In the case of a negative externality, the cost is being borne by society as a whole, which is why the supply curve fails to reflect the total cost. Therefore, the correct answer is C, the market for good x is characterized by a negative externality.

If We Know That the Supply Curve for Good X