In the case of an external cost, marginal private cost is equal to marginal social cost for all quantity levels.
The correct answer and explanation is:
The correct answer is false.
In the case of an external cost, marginal private cost (MPC) is not equal to marginal social cost (MSC) for all quantity levels. An external cost occurs when a third party, not directly involved in the economic transaction, bears part of the costs of the production or consumption of a good. These costs are not reflected in the private cost incurred by the producer or consumer, but they do affect society as a whole.
Marginal private cost refers to the additional cost incurred by producers when producing one more unit of a good or service. It only considers the direct costs to the producer, such as labor, materials, and other inputs.
On the other hand, marginal social cost includes both the private costs and the external costs. These external costs arise when the production or consumption of a good or service imposes costs on individuals or society that are not borne by the producer or consumer. For example, pollution generated by a factory imposes a health cost on the local community or environmental damage that society has to deal with, which is not reflected in the MPC.
Since the MSC includes both the MPC and the external costs, it is always higher than the MPC in the presence of external costs. This difference causes market failure because the producer or consumer does not account for the full cost to society, leading to overproduction or overconsumption of the good. Therefore, when external costs are present, the social optimum level of production will be lower than the private optimum level, where marginal social cost equals marginal social benefit.