In a market in which firms are able to reduce their private costs by shifting costs onto others, _____.
A)there will be underproduction of a good
B)there will be positive externalities in production
C)the market prices of goods produced by firms will be too low relative to the social optimum
D)output of the good being produced will be too high relative to the social optimum
E)the intersection of the demand curve and the social cost of production curve will determine the equilibrium quantity

Question

Quizplus · Accepted Answer

When firms are able to shift costs onto others, they fail to take into account the negative externalities they are imposing on society. As a result, they will produce too much output relative to the social optimum, leading to overproduction of the good. This is why choice D is correct. Choices A and B are incorrect because underproduction implies that firms are not producing enough output, whereas positive externalities imply that there are benefits to society from production that are not accounted for by firms. Choice C is incorrect because low market prices would imply that firms are not earning enough to cover their private costs, whereas in this case, they are able to shift their costs onto others. Finally, choice E is incorrect because the equilibrium quantity determined only by the intersection of demand and social cost curves would not take into account the negative externalities imposed by firms.

In a Market in Which Firms Are Able to Reduce