Which of the following best describes an effect of prohibiting a good that generates negative externalities?

• A. It always leads to an efficient allocation of resources.
• B. It eliminates all externalities related to the good.
• C. It increases the private benefits received by consumers.
• D. It can reduce the social costs associated with the good by decreasing its consumption.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of negative externalities. A negative externality occurs when the consumption or production of a good imposes costs on third parties that are not reflected in the market price.
2. Step 2: Recognize that prohibiting a good with negative externalities aims to reduce or eliminate the consumption of that good, thereby potentially reducing the social costs imposed on society.
3. Step 3: Analyze why prohibition does not always lead to an efficient allocation of resources. Efficiency requires balancing benefits and costs, and prohibition might cause unintended consequences such as black markets or loss of consumer surplus.
4. Step 4: Consider that prohibition does not necessarily eliminate all externalities because some external costs might persist through alternative means or related goods.
5. Step 5: Conclude that the best description is that prohibition can reduce social costs by decreasing consumption, but it does not guarantee efficiency or complete elimination of externalities.