A perfectly competitive chemical plant dumps large amounts of waste into a nearby river. From society's perspective, the chemical plant:
A) Is producing too much.
B) Is not producing enough.
C) Is producing just the right amount.
D) Will produce more steel after it installs pollution control equipment.
E) Will produce less if local government imposes a pollution tax.

Question

Quizplus · Accepted Answer

The chemical plant is producing too much because it is not taking into account the negative externality it is creating by dumping waste into the river. This externality is a cost to society that is not being borne by the chemical plant, so the plant is producing more than the socially optimal amount.

A Perfectly Competitive Chemical Plant Dumps Large Amounts of Waste