Negative externalities lead markets to produce:

• A. goods with no impact on social welfare
• B. less than the socially optimal quantity
• C. exactly the socially optimal quantity
• D. more than the socially optimal quantity

Answer: (D)

Verified step by step guidance

1. Understand the concept of a negative externality: it occurs when the production or consumption of a good imposes a cost on third parties that is not reflected in the market price.
2. Recognize that because these external costs are not accounted for by producers or consumers, the private cost is lower than the social cost of producing the good.
3. Recall that in a free market without intervention, firms produce where private marginal cost equals marginal benefit, ignoring the external cost.
4. Since the social marginal cost (which includes the external cost) is higher than the private marginal cost, the market equilibrium quantity will be greater than the socially optimal quantity.
5. Therefore, negative externalities cause markets to produce more than the socially optimal quantity, leading to overproduction and a loss in social welfare.