If a negative externality exists, then there is a __________ when society produces the market output instead of the socially optimal output. This exists because the __________ to sellers and third parties are __________ the __________ derived by buyers.
A)net social benefit; costs; greater than; benefits
B)net social cost; benefits; less than; costs
C)net social cost; costs; greater than; benefits
D)net social cost; costs; less than; benefits

Question

Quizplus · Accepted Answer

With a negative externality, the cost to third parties (those not involved in the transaction) is greater than the benefits derived by buyers. This leads to a net social cost when society produces the market output instead of the socially optimal output. Choice A is incorrect because a negative externality implies a net social cost, not benefit. Choice B is incorrect because it implies that the benefits of producing the market output outweigh the costs, which is not the case with a negative externality. Choice D is incorrect because it suggests that the costs to society are less than the benefits, which is not true with a negative externality.

If a Negative Externality Exists, Then There Is a __________