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In: Economics

Consider the statement: “A market with a negative externality will produce more than the efficient quantity...

Consider the statement: “A market with a negative externality will produce more than the efficient quantity of the good, creating a deadweight loss.” Do you agree or disagree? Explain clearly. You may use a graph to help you explain

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Expert Solution

We agree to this statement.

Overproduction is the result of lack of incentives faced by the creators of externality to internalize the external cost of their action on the society that has not participated in the transaction. Negative externality results when market participants generate a cost that is imposed on the society and they do not internalize it (include it in their cost function). This results in overproduction and a deadweight loss as an area of triangular region formed between F and E. This is shown below

Rahul Sunny answered 1 year ago
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