When production or consumption of a product causes negative effects on third parties, we say that

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BlackTom AI · Accepted Answer

A negative externality occurs when production or consumption imposes costs on third parties not reflected in market transactions, so private decisions ignore these external costs. 1. Relevant knowledge points and concepts - Marginal Private Cost (MPC): cost borne by producers. - Marginal Social Cost (MSC): MPC + external (negative) cost. - Marginal Private Benefit (MPB): benefit to consumers (equals social benefit if no externality). - Market equilibrium occurs where MPC = MPB; social optimum is where MSC = MPB. - When MSC > MPC, the market outcome ignores the external cost and leads to overproduction relative to the social optimum. 2. Step-by-step reasoning - Define MSC = MPC + external cost (external cost > 0 for a negative externality). - The market sets quantity Qmarket where MPC = MPB. - Because MSC > MPC at any given quantity, at Qmarket MSC > MPB. That means the social-optimal condition MSC = MPB would be satisfied at a smaller quantity Qsocial < Qmarket. - Therefore the market produces and consumes more than is socially optimal. 3. Calculations / intermediate inequalities (conceptual) - MSC = MPC + e, with e > 0. - Market: MPC = MPB. - Social optimum: MSC = MPB -> MPC + e = MPB. - Since e > 0, MPC (at market equilibrium) = MPB < MPC + e = MSC, implying Qmarket > Qsocial. 4. Why the correct answer is correct - Because negative externalities raise the true social cost above the private cost, the unregulated market produces too much of the good, which is an over-allocation of resources relative to the social optimum. This matches answer d. 5. Why the other options are incorrect - a. Subsidy to consumers would encourage more consumption, worsening the negative externality; the appropriate corrective instrument is a tax, not a subsidy. - b. The equilibrium quantity is too high, not too low, because external costs are ignored. - c. The market price is effectively too low relative to the social cost (not too high); consumers and producers do not pay the external cost, so price doesn’t reflect full social cost. 6. Conclusion - The correct choice is d. there is an over-allocation of resources towards this product. This matches the provided answer.

When production or consumption of a product causes negative effects on third parties, we say thatSingle choice

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