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In the case of a negative externality: (a) the private market does not produce enough of the good
In the case of a negative externality:
(a) the private market does not produce enough of the good.
(b) market price reflects the social costs of production.
(c) efficiency requires that the government impose a subsidy.
(d) market price reflects only the private costs of production.
(e) the market price is above the efficient price.
Expert Solution
The correct option is (d) market price reflects only the private costs of production.
When there is a negative externality caused due to the production of a good, the private costs of production are lower than the social costs of production. However, the firms are only paying private costs and thus keep their prices lower. When the government makes the producers responsible for the external costs, the supply curve shifts to the left, and the market price goes up.
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