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In a competitive market, if the production process involves an external cost, such as pollution of the environment, the market will: a
In a competitive market, if the production process involves an external cost, such as pollution of the environment, the market will:
a. Produce the economically efficient outcome,
b. Result in a market price that is higher than the efficient one,
c. Result in a market price that is lower than the efficient one,
d. Result in too little of the good being produced compared to the ideal efficient outcome.
Expert Solution
- The correct option is (c). Result in a market price that is lower than the efficient one.
As a general notion, when there is a negative externality then the firms tend to raise their profitability level by raising the quantity of production which in turn reduces the market price of the product below the efficient/optimal level. Henceforth, it can be inferred that a negative externality will result in a decline in the market price of the product below the efficient level.
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