Choose all answers that are correct: What happens when a negative externality in production is present...

Choose all answers that are correct: What happens when a negative externality in production is present in a market

I. The price determined by the "free market" is artificially low

II. The price determined by the "free market" is artificially high

III. The quantity determined by the "free market" is artificially low

IV. The quantity determined by the "free market" is artificially high

Group of answer choices

-I and IV

-II and IV

-II and III

-I and III

Solutions

Expert Solution

Answer : The answer is option A : "I and IV".

If a market has negative externality the market's marginal social cost (MSC) is lower than the marginal private cost (MPC). For this reason with negative externality the free market price is lower than the socially optimal price level. And with negative externality the free market quantity is higher than the socially optimal quantity level. Therefore, here the statements I and IV are correct. Hence option A is the correct answer.

Rahul Sunny answered 1 year ago

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