Multiple Choice
Which of the following best measures the impact of a negative supply shock in the presence of externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is always true about a negative externality?
A
There are no effects on third parties.
B
The market equilibrium quantity is less than the socially optimal quantity.
C
The social cost of production exceeds the private cost.
D
The social benefit of consumption exceeds the private benefit.
Verified step by step guidance1
Understand the concept of a negative externality: it occurs when the production or consumption of a good imposes a cost on third parties that is not reflected in the market price.
Identify the difference between private cost and social cost. Private cost is the cost borne by the producer, while social cost includes both the private cost and the external cost imposed on others.
Recognize that in the presence of a negative externality, the social cost of production is higher than the private cost because it accounts for the external harm caused.
Recall that the market equilibrium quantity tends to be higher than the socially optimal quantity in the case of a negative externality, because producers do not bear the full cost of production.
Conclude that the statement 'The social cost of production exceeds the private cost' is always true for a negative externality, while the other options are incorrect or do not always hold.
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