When a negative externality is present, the socially optimal level is less than the private market equilibrium.

Question

Quizplus · Accepted Answer

In the presence of a negative externality, the private market equilibrium results in a higher quantity and lower price than the socially optimal level. This is because the cost to society (e.g. pollution) is not reflected in the price of the good, and thus consumers and producers do not take it into account when making their decisions. Therefore, the socially optimal level is less than the private market equilibrium.

When a Negative Externality Is Present, the Socially Optimal Level