Which of the following will most likely result from a negative externality, such as pollution, in a market economy?

• A. There will be no difference between social and private costs.
• B. The social benefit will exceed the private benefit.
• C. The market will produce less than the socially optimal quantity.
• D. The social cost of production will exceed the private cost.

Answer: (D)

Verified step by step guidance

1. Understand the concept of a negative externality: it occurs when a third party suffers a cost due to a market transaction, such as pollution caused by production.
2. Identify the difference between private cost and social cost: private cost is the cost borne by the producer, while social cost includes both the private cost and the external cost imposed on society.
3. Recognize that with a negative externality, the social cost is greater than the private cost because it accounts for external damages like pollution.
4. Analyze the market outcome: since producers only consider private costs, they tend to produce more than the socially optimal quantity, leading to overproduction.
5. Conclude that the presence of a negative externality causes the social cost of production to exceed the private cost, resulting in market inefficiency.