question archive If the production of a good produces an external cost, then what is the efficient quantity? a
If the production of a good produces an external cost, then what is the efficient quantity? a
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If the production of a good produces an external cost, then what is the efficient quantity?
a. Less than the quantity at which the marginal benefit equals the marginal cost,
b. The quantity at which the marginal private benefit is greater than the marginal social benefit,
c. The quantity at which the marginal benefit equals marginal cost,
d. More than the quantity at which the marginal benefit equals the marginal cost.
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The correct answer is a. Less than the quantity at which the marginal benefit equals the marginal cost.
This is because the external costs are treated as negative externality on the nation. The presence of external cost would lead to a reduction in the welfare of society. It means that the private benefit is larger than the social benefit. Consequently, a deadweight loss would occur in the economy and it results in disequilibrium. The socially optimum allocation is estimated lesser as compared to the equilibrium quantity.
