When the production of a good creates external costs,
A)Profits for the producer of the good will be lower.
B)Production of the good will be lower.
C)Society's collective well-being will be lower.
D)The level of environmental pollution will be lower.

Question

Quizplus · Accepted Answer

When the production of a good creates external costs, it means that the negative effects of producing the good are not fully borne by the producer, but also by society as a whole. This leads to a misallocation of resources where the cost of production is lower than the social cost of production. As a result, the market equilibrium quantity will be higher than the socially optimal quantity. This leads to negative externalities such as pollution, congestion or harm to health. Thus, society's collective well-being will be lower. The producer may be able to earn profits, but the overall impact on society will be negative.

When the Production of a Good Creates External Costs