In a market where negative externalities are associated with consumption and production, the equilibrium will not be efficient because:
A) Too few resources will be allocated towards producing the good
B) Firms will shut down until costs are reduced
C) Costs of production will, on average, be too high
D) Too many resources will be allocated towards producing the good

Question

Quizplus · Accepted Answer

In a market with negative externalities, the social cost of production and consumption is greater than the private cost. This means that too many resources are being allocated towards producing the good, and the equilibrium is not efficient. This is because the market is not taking into account the negative effects that production and consumption have on third parties. As a result, the equilibrium quantity is higher than the socially optimal quantity. Therefore, choice D is the correct answer.

In a Market Where Negative Externalities Are Associated with Consumption