Question

A negative externality is when_ _hlank #1) consumption (blank #2) leading to production or Blank #1: A. demand exceeds supply . в. social benefits exceed private benefits C. social costs exceed private costs D. marginal costs exceed total costs Blank # 2 A. excessively expensive . В. too much C. the wrong kind of D. too little Ш

Answer 1

When action of one individual creates loss to others but people who get loss due to that person action, does not receive any compensation from that person, then it is called negative externality.

So private market equilibrium will be determined by the intersection of the MPC and MSB.

So social optimum will be determined by the intersection of the MSC and MSB.

In case of negative externalities, the social optimum quantity of production of goods will be less than the private market equilibrium quantity.

The social optimum price will be greater than the private optimum price.

Hence it can be said that a negative externality is when social costs exceed private costs leading to too much production or consumption.

Hence in case of first blank, option c is the correct answer.

In case of second blank option B is the correct answer.