When a firm produces a product that creates external costs
A) the firm produces a level of output larger than would be produced without the external cost.
B) the firm produces a level of output smaller than would be produced without the external cost.
C) the firm produces a level of output which would be the same as it would produce without the external cost.
D) the market provides the efficient level of output even with the existence of the external cost.

Question

Quizplus · Accepted Answer

When a firm produces a product that creates external costs, it does not factor in the cost of the negative externality in its production decision. Therefore, the firm will produce a level of output larger than what would be produced if the cost of the negative externality was considered. This leads to an inefficient outcome where the quantity produced is greater than the socially optimal level.

When a Firm Produces a Product That Creates External Costs