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As a general rule, if pollution costs are external, firms will produce a
As a general rule, if pollution costs are external, firms will produce
a. too little of the good generating the pollution.
b. too much of the good generating the pollution.
c. an optimal amount of the good generating the pollution.
d. cannot be determined without additional information
Expert Solution
b. too much of the good generating the pollution
Reason: The external costs generated by the production activities of a firm results in negative market externality. This external cost is borne by the society as a whole and makes the marginal social cost much greater than the marginal private cost that goes in production or consumption of such goods. Since the marginal cost in such cases is much greater, than the marginal private costs, the market overproduces the good, generating more pollution.
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