Figure: Efficiency and Pollution
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution.In the absence of government intervention, the marginal social cost of pollution will equal ________ while the marginal social benefit of pollution will equal _.
A)$25; $5
B)$5; $25
C)$15; $15
D)$25; $0

Question

Quizplus · Accepted Answer

In the absence of government intervention, the market will produce where the marginal private benefit (MPB) of the last unit of pollution equals its marginal private cost (MPC). However, the social cost of pollution (MSC) is higher than the MPC, due to the negative externalities imposed on society. Therefore, the market will produce too much pollution. The point where MPC intersects with MSC is at $25 of pollution, while the marginal social benefit (MSB) of pollution is zero, as the negative effects of pollution outweigh any potential benefits. Thus, the best choice is for the government to intervene and reduce pollution to the socially optimal level where MSC equals MSB, which would be at $0 of pollution.