Suppose that electricity producers create a negative externality equal to $5 per unit.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?
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 is not accounted for in the market price, leading to overproduction.

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