Consider an industry that produces an output Q with marginal private cost (MC) and marginal social cost (MSC) as given in the table: Which of the following is TRUE?
A) The production of each additional unit results in a larger marginal external cost.
B) The production of each additional unit results in the same marginal external cost.
C) The production of each additional unit results in a lower marginal external cost.
D) There are no marginal external costs associated with the production of this good.

Question

Consider an industry that produces an output Q with marginal private cost (MC) and marginal social cost (MSC) as given in the table:  Which of the following is TRUE?
A) The production of each additional unit results in a larger marginal external cost. 
B) The production of each additional unit results in the same marginal external cost. 
C) The production of each additional unit results in a lower marginal external cost. 
D) There are no marginal external costs associated with the production of this good.

Quizplus · Accepted Answer

The marginal external cost (MEC) is the difference between the marginal social cost (MSC) and the marginal private cost (MC). In the given table, the MSC is higher than the MC for every unit of Q produced, indicating that there is a negative externality associated with the production of this good. As more units of Q are produced, the difference between the MSC and MC (i.e. the MEC) increases, implying that the production of each additional unit results in a larger marginal external cost. Therefore, choice A is the correct answer.

Consider an Industry That Produces an Output Q with Marginal