If the social cost is greater than the private cost in a particular market,the socially optimal equilibrium will be at a quantity:
A) greater than the private level.
B) equal to the private level.
C) less than the private level.
D) greater than or less than the private level, depending on the size of the external costs.

Question

Quizplus · Accepted Answer

If the social cost is greater than the private cost, it means that there are external costs imposed on society that are not reflected in the private cost. Therefore, the private market equilibrium will lead to an overproduction of the good, resulting in a quantity that is greater than the socially optimal level. To reach the socially optimal level, the quantity produced needs to be reduced. Hence, the socially optimal equilibrium will be at a quantity less than the private level.

If the Social Cost Is Greater Than the Private Cost