When a firm creates negative externalities by polluting, in order to achieve the socially efficient outcome:
A)the firm's production should be prohibited.
B)the firm's production should be increased and the price of its output should be decreased.
C)the firm's production should be increased and the price of its output should be increased.
D)the firm's production should be reduced and the price of its output should be increased.

Question

When a firm creates negative externalities by polluting, in order to achieve the socially efficient outcome:
A)​the firm's production should be prohibited.
B)​the firm's production should be increased and the price of its output should be decreased.
C)​the firm's production should be increased and the price of its output should be increased.
D)​the firm's production should be reduced and the price of its output should be increased.

Quizplus · Accepted Answer

When a firm creates negative externalities by polluting, the socially efficient outcome is achieved by reducing the firm's production and increasing the price of its output. This will increase the cost of production for the firm, thereby forcing them to internalize the external costs of pollution, and encourage the development of cleaner production technologies. By increasing the price of its output, demand for the firm's product will decrease, reducing the quantity of pollution generated in the economy. Therefore, reducing production to internalize the external costs of pollution and increasing the price to reduce demand for harmful products is the optimal solution.

When a Firm Creates Negative Externalities by Polluting, in Order