An industry will produce more than the socially efficient level of output under which of the following conditions?

Question

BlackTom AI · Accepted Answer

The correct answer is 'The production or consumption of a good generates a negative externality.' This is because negative externalities occur when the production or consumption of a good imposes costs on third parties that are not reflected in the market price. As a result, the private cost to producers is lower than the social cost, leading to overproduction from a societal perspective. The socially efficient level of output is where the social marginal cost equals the social marginal benefit. However, when negative externalities are present, the market equilibrium output is higher than this socially efficient level because the external costs are not accounted for by the producers.

In contrast, if a good generates a positive externality, the market tends to underproduce it, as the social benefits exceed the private benefits, and thus the socially efficient level of output is higher than the market equilibrium. A monopoly, on the other hand, typically produces less than the socially efficient level of output because it restricts output to maximize profits, leading to a deadweight loss. Public goods are characterized by non-excludability and non-rivalry, which often leads to underproduction due to the free-rider problem, not overproduction. Private goods do not inherently lead to overproduction or underproduction unless they are associated with externalities. Therefore, the presence of a negative externality is the condition that leads to overproduction relative to the socially efficient level.

An industry will produce more than the socially efficient level of output under which of the following conditions?Single choice

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