A monopoly might produce less than the socially optimal amount of pollution because
A) it likes to be a good citizen.
B) it sets price above marginal cost.
C) it earns economic profit.
D) it internalizes the external costs.

Question

Quizplus · Accepted Answer

A monopoly sets its price above marginal cost, which means that it produces less output than the socially optimal amount. This leads to a situation where the marginal social cost of pollution exceeds the marginal private cost of pollution. Therefore, the monopoly has an incentive to produce less pollution than the socially optimal level. However, this is not because it likes to be a good citizen or because it internalizes external costs. It is simply a result of its market power and profit-maximizing behavior.

A Monopoly Might Produce Less Than the Socially Optimal Amount