Consider a good with external costs. Which of the following best describes why the market does not produce an allocatively efficient amount?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aThe marginal benefit to consumers exceeds the marginal private cost of production and the marginal social cost of production.bThe marginal social cost exceeds the marginal social benefit.cThe marginal social benefit exceeds the marginal social cost.dThe marginal private cost of production and the marginal social cost exceed the marginal benefit to consumers.Unanswered2 attempts left
Question
Consider a good with external costs. Which of the following best describes why the market does not produce an allocatively efficient amount?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aThe marginal benefit to consumers exceeds the marginal private cost of production and the marginal social cost of production.bThe marginal social cost exceeds the marginal social benefit.cThe marginal social benefit exceeds the marginal social cost.dThe marginal private cost of production and the marginal social cost exceed the marginal benefit to consumers.Unanswered2 attempts left
Solution
The best answer is b. The marginal social cost exceeds the marginal social benefit.
Here's why:
In a market with external costs (also known as negative externalities), the cost to society is greater than the cost to the producer. This is because external costs, like pollution, are not reflected in the private costs of production.
When the marginal social cost (the cost to society) exceeds the marginal social benefit (the benefit to society), it means that each additional unit of the good produced is costing society more than it benefits society.
In an allocatively efficient market, the marginal social cost would equal the marginal social benefit. But in this case, because the marginal social cost is higher, the market is producing more of the good than is efficient. This is because the market does not take into account the external costs when deciding how much to produce.
So, the market is not producing an allocatively efficient amount because it is overproducing the
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