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If the production of a good causes a negative externality, then the social-cost curve will lie ________________ the supply curve, and the socially optimal quantity is _________________ than the equilibrium quantity.
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7. Externalities
Externalities: Social Benefits and Social Costs
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What is a negative externality?
A
A cost imposed on third parties not involved in the transaction, making social cost exceed private cost.
B
A cost borne exclusively by the producer or consumer directly involved in the transaction (a private cost).
C
A situation in which private and social costs are equal so there is no external effect.
D
A benefit received by third parties not involved in the transaction, making social benefit exceed private benefit.
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Step 1: Understand the concept of externalities in economics. Externalities occur when a transaction between two parties affects a third party who is not directly involved in the transaction.
Step 2: Differentiate between positive and negative externalities. A positive externality provides benefits to third parties, while a negative externality imposes costs on them.
Step 3: Recognize that a negative externality means the social cost of a good or service is higher than the private cost borne by the producer or consumer. This happens because the third parties bear some of the costs without compensation.
Step 4: Recall that private cost refers to the cost directly incurred by the producer or consumer, while social cost includes both private cost and the external cost imposed on others.
Step 5: Conclude that a negative externality is best described as a cost imposed on third parties not involved in the transaction, making social cost exceed private cost.
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