If perfectly competitive firms have to account for external costs of production, then at the equilibrium level of output
A) P = MC
B) P

Question

If perfectly competitive firms have to account for external costs of production, then at the equilibrium level of output
A) P = MC
B) P < MSC
C) MC = MSC
D) Both A and C are correct.

Quizplus · Accepted Answer

In a perfectly competitive market, firms produce where price (P) equals marginal cost (MC) for efficiency. When accounting for external costs, the marginal social cost (MSC) includes both MC and external costs. Thus, at equilibrium, P = MC and MC = MSC, making both A and C correct.

If Perfectly Competitive Firms Have to Account for External Costs