When a negative externality exists, the private market produces
products at a low opportunity cost.
products at a high opportunity cost.
less than the economically efficient output level.
more than the economically efficient output level.
The Correct Answer and Explanation is :
The correct answer is: more than the economically efficient output level.
Explanation:
A negative externality arises when the consumption or production of a good or service imposes a cost on a third party that is not reflected in the price of the good. Common examples of negative externalities include pollution, noise, or secondhand smoke. When a negative externality is present, the private market does not account for the full social costs of production or consumption. This results in market failure.
In a market without externalities, the price of a good reflects both the private costs of production and the benefits to consumers. However, with a negative externality, producers and consumers only consider their private costs and benefits, ignoring the external costs to society. As a result, the quantity of goods produced and consumed is higher than what would be socially optimal.
For example, if a factory produces a product that causes pollution, the factory might not bear the full cost of cleaning up the pollution. Instead, the surrounding community and environment bear this burden. Because the factory does not include these external costs in the price of the product, it produces more than is socially desirable, leading to overproduction and inefficiency.
In terms of the economically efficient output level, the socially optimal quantity is lower than the market quantity because the external costs are not accounted for. To correct for this, government intervention through taxes or regulations might be necessary to internalize the externality, ensuring that producers and consumers consider the full social costs of their actions. Without intervention, however, the market will continue to produce more than the economically efficient output level.
Let me create an image to visualize this.
Here is an image that illustrates the concept of a negative externality. It shows how the market output is higher than the socially optimal output due to external costs not considered by producers. The area between the market quantity and the socially optimal quantity represents the overproduction caused by the negative externality. Let me know if you’d like further explanation!