Question

Suppose the production of a particular good causes a negative externality. Based on market forces​ only, how will this impact the production levels for a factory if negative externalities are​ present? A. It will produce the good below the socially efficient level. B. It will produce the same level regardless of whether externalities are present. C. It will produce the good above the socially efficient level. D. Negative externalities do not impact production levels.

Answer 1

Answer:

C. It will produce the good above the socially efficient level.

Explanation:

The socially efficient level of production is reached where marginal/total costs of production equals marginal/total benefits of production.

A negative externality is a cost that is not reflected in the price of goods if left to market forces alone.

Therefore, producers will over-supply to the level where the only their costs of production (equals total social costs minus cost of negative externality) equals total benefits to society (indicated by demand).