Principles of Microeconomics
Principles of Microeconomics
If the production of a good yields a negative externality, then the social-cost curve lies ________ 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
Option (b):
If the production of a good yields a negative externality, then the social cost curve lies above the supply curve, and the socially optimal quantity is less than the equilibrium quantity. Negative externality always creates social cost. So, it lies above the supply curve of the production of that good. But a positive externality creates social benefit to the society. Thus, option “b” is correct.
Option (a):
If the production of a good yields a negative externality, then the social cost curve lies above the supply curve, and the socially optimal quantity will be less than the equilibrium quantity; not greater than the equilibrium quantity...
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