In an efficient market, the supply curve will decrease by the amount of the external cost.

Question

Quizplus · Accepted Answer

In an efficient market, prices reflect all costs associated with a transaction, including external costs. Therefore, producers will internalize the cost of the externality, and the supply curve will shift leftward by the amount of the external cost, resulting in a decrease in the quantity supplied. This is the optimal outcome from a social welfare perspective, as it ensures that the true cost of production is reflected in prices, and resources are allocated efficiently.

In an Efficient Market, the Supply Curve Will Decrease by the Amount