If the production of paper causes economic damage to a community, allowing the market to set the price of paper equal to the private marginal cost of producing paper will
A) generate less than the optimal quantity of paper produced
B) generate more than the optimal quantity of paper produced
C) generate an equilibrium price that is higher than the price associated with the market's most efficient level of output
D) cause some but not all paper producers to go out of business
E) benefit society because of externalities generated by the production

Question

Quizplus · Accepted Answer

When the production of paper causes economic damage to a community (an external cost), allowing the market to set the price equal to the private marginal cost (without considering the external cost) will result in overproduction. This is because the true social cost of producing paper is higher than what is reflected in the market price, leading to more production than is socially optimal.

If the Production of Paper Causes Economic Damage to a Community