If a negative externality exists in the production of paper and paper is sold in a perfectly competitive market,then the equilibrium output
A) is greater than the socially optimal output.
B) is smaller than the socially optimal output.
C) is the same as the socially optimal output.
D) may be either more or less than the socially optimal output.
E) may be either equal to,or less than,the socially optimal output.

Question

Quizplus · Accepted Answer

A negative externality means that the social cost of production is higher than the private cost. In a perfectly competitive market, firms do not account for this external cost, leading to overproduction compared to the socially optimal level.

If a Negative Externality Exists in the Production of Paper