If a good has an external cost, what is true about the marginal private cost curve: a

Marketing Dec 25, 2020

If a good has an external cost, what is true about the marginal private cost curve:

a. It lies below the marginal social cost curve,

b. It lies above the marginal social cost curve,

c. It is negative,

d. It is the same as the marginal external cost curve.

Expert Solution

The answer is: a). It lies below the marginal social cost curve.

The marginal cost curve is an upward sloping curve that reflects the firm's supply curve. If the production leads to a negative externality, internalization of the external cost (the damage caused by the negative externality) shifts the marginal private cost upward and to the left, and the resultant curve is called social marginal cost. If the production creates a positive externality, the social marginal cost curve could be below the marginal private cost curve.

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