If the production of ukuleles creates a negative externality that is not corrected for by the government, the equilibrium quantity of ukuleles is
A)higher than optimal.
B)lower than optimal.
C)efficient.
D)at a optimal level.

Question

Quizplus · Accepted Answer

A negative externality means that the social cost of producing ukuleles is higher than just the private cost that the producer incurs. This means that at the market equilibrium quantity, there is overproduction of ukuleles since the marginal social cost (private cost + cost of the negative externality) is greater than the marginal social benefit. Therefore, the equilibrium quantity will be higher than optimal.

If the Production of Ukuleles Creates a Negative Externality That