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Homework answers / question archive / Competitive markets with negative externalities are: a

Competitive markets with negative externalities are: a

Marketing

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

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  • 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.