If there are external costs of production and perfectly competitive firms do not account for these costs, at the equilibrium level of output A) P = MC = MSC. B) P = MC and P MSC. D) P MC and P = MSC.

Question

If there are external costs of production and perfectly competitive firms do not account for these costs, at the equilibrium level of output
A) P = MC = MSC.
B) P = MC and P < MSC.
C) P = MC and P > MSC.
D) P > MC and P = MSC.

Quizplus · Accepted Answer

In the presence of external costs of production that are not accounted for by perfectly competitive firms, the market price (P) equals the marginal cost (MC) of production from the firm's perspective, but is less than the marginal social cost (MSC), which includes both the private costs and the external costs. This discrepancy occurs because the external costs are not internalized in the firm's production decisions.

If There Are External Costs of Production and Perfectly Competitive