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Competitive markets with negative externalities are: a
Competitive markets with negative externalities are:
a. efficient to consumers and producers but not to third parties.
b. efficient because PMC=MB.
c. inefficient because SMC>MB
d. inefficient because PMC>MB
e. inefficient because SMC=PMC
Expert Solution
- Competitive markets with negative externalities are c. inefficient because SMC>MB.
With negative externality, social marginal cost (SMC) is higher than private marginal cost (PMC), i.e., SMC > PMC. To maximize profit in a competitive market, firms produce where private marginal cost is equal to marginal benefit, i.e., PMC = MB. It then follows that SMC > MB. This is inefficient because the competitive market is over-producing relative to the socially optimal outcome.
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