Which of the following describes how a negative externality affects a competitive market? A) The externality causes consumer surplus to exceed producer surplus

• The correct answer is C). The externality causes a difference between the private cost of production and the social cost.

In the presence of negative externality, the social cost of a product surpasses the private cost. Negative externality, such as water and noise pollution, results in a cost to the third party. This shift the marginal private cost (MPC) curve upward and to the left, with an amount equal to the external damage (E) caused. The resulting curve is called marginal social cost (MSC) curve.