Question

Suppose that a negative externality is created by the production of good X. Which of the following statements is correct?
a. The social cost of producing good X includes the private cost plus the cost to bystanders of the externality.
b. The increased social cost can be graphed as a decrease in demand.
c. The market equilibrium quantity will be the socially optimal quantity as long as the government does not interfere.
d. Both a and b are correct.

Answer 1

Answer:

The answer is: A) The social cost of producing good X includes the private cost plus the cost to bystanders of the externality.

Explanation:

Negative externalities are costs suffered by third parties as a consequence of producing a certain product or service. Negative externalities are caused by the consumption of products, but the third parties damaged are no involved in the buyer-seller transaction. Social costs include production costs plus negative externalities.