Question

Which of the following statements are true regarding externalities? (Check all thot apply.) OA. In the case of an extemality, the free market wil maximize social surplus. occurs when an economic activity has a spillover cost to a bystander. C. Deadweight loss can be either a foregone benefit or the total cost of the externality to society. D. For compuing efficient outcomes, economic agente adjust the demand curve to account for negative extenalities In the case of the negative extemality,the socially effcient output wilberolative to the market quantity. Which of the following is the correct definition of marginal social cost? (Check all that apply.) A. marginal cost of the externality + marginal external cost. B. marginal private cost+ marginal cost of externality C. marginal private cost + marginal external cost. D. marginal cost + marginal benefit Click to select your answer(s). 14

Answer 1

• If an activity of one party affects the third party either positively or negatively is called an externality. Negative externality creates spillover cost to society. The social cost is more than the private cost in negative externality. Option B is correct
• In the case of the negative externality, the socially efficient output will be less than relative to the market quantity.
• Marginal social cost=marginal private cost+marginal external cost. Therefore option c is correct.