In a market where negative externalities are associated with consumption and production, the equilibrium will not be eﬃcient because
A) too few resources will be allocated toward producing the good.
B) ﬁrms will shut down until costs are reduced.
C) costs of production will, on average, be too high.
D) too many resources will be allocated toward producing the good.

Question

Quizplus · Accepted Answer

Negative externalities associated with consumption and production result in a higher social cost than the private cost paid by the producer and consumers. This means that too many resources will be allocated towards producing the good as private costs do not account for the social cost. The equilibrium will be inefficient as the market will produce at a higher quantity than socially optimal, leading to a deadweight loss.

In a Market Where Negative Externalities Are Associated with Consumption