Multiple Choice
Which of the following statements about the bullwhip effect in supply chains is correct?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
If the production of a good causes a negative externality, then the social-cost curve will lie ________________ the supply curve, and the socially optimal quantity is _________________ than the equilibrium quantity.
A
Above; Greater
B
Above; Less
C
Below; Greater
D
Below; Less
Verified step by step guidance1
Understand the concept of negative externality: A negative externality occurs when the production or consumption of a good imposes a cost on a third party. This means that the private cost to producers is less than the social cost, which includes the external costs.
Identify the relationship between the social-cost curve and the supply curve: The supply curve represents the private cost of production. When there is a negative externality, the social-cost curve, which includes both private and external costs, will lie above the supply curve.
Determine the socially optimal quantity: The socially optimal quantity is the level of production where the social cost equals the social benefit. This is typically less than the market equilibrium quantity because the market does not account for the external costs.
Compare the socially optimal quantity to the equilibrium quantity: In the presence of a negative externality, the equilibrium quantity (where supply equals demand) is greater than the socially optimal quantity because the market fails to internalize the external costs.
Conclude the relationship: Therefore, with a negative externality, the social-cost curve lies above the supply curve, and the socially optimal quantity is less than the equilibrium quantity.
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