Suppose that coal producers create a negative externality equal to $5 per ton of coal. What is the relationship between the equilibrium quantity of coal and the socially optimal quantity of coal?
A)They are equal.
B)The equilibrium quantity is greater than the socially optimal quantity.
C)The equilibrium quantity is less than the socially optimal quantity.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The equilibrium quantity is greater than the socially optimal quantity because the negative externality ($5 per ton of coal) is not accounted for in the market price, leading to overproduction relative to the socially optimal level where external costs are considered.

Suppose That Coal Producers Create a Negative Externality Equal to $5