Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality,
A)the supply curve would adequately reflect the marginal social cost of production.
B)consumers will be required to pay a higher price for steel than they would have if the externality were internalized.
C)the market equilibrium quantity will not be the socially optimal quantity.
D)producers will produce less steel than they otherwise would if the externality were internalized.

Question

Quizplus · Accepted Answer

If the market does not internalize the negative externality, the supply curve would reflect only the private cost of production, which is lower than the social cost. This would lead to a higher equilibrium quantity than the socially optimal quantity. Therefore, the market equilibrium quantity will not be the socially optimal quantity.

Suppose That a Steel Factory Emits a Certain Amount of Air