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

Question

BlackTom AI · Accepted Answer

Private marginal cost (PMC) is lower than social marginal cost (SMC) when a negative externality exists, because SMC = PMC + marginal external cost (MEC). This gap means the market ignores harm imposed on third parties, so the market equilibrium quantity exceeds the socially optimal quantity.

Step-by-step reasoning:
1) Define the curves: PMC is the firm’s private supply cost; SMC = PMC + MEC includes external harm. Demand = marginal benefit (MB).
2) Market equilibrium is where MB = PMC. Social optimum is where MB = SMC. Because SMC > PMC, the intersection MB = SMC occurs at a smaller quantity than MB = PMC.
3) Algebraic illustration (simple numeric example):
   - Let PMC = 10 + Q, MEC = 2, so SMC = 12 + Q.
   - Let demand MB = 20 − Q.
   - Market equilibrium: 20 − Q = 10 + Q → 2Q = 10 → Q_market = 5.
   - Social optimum: 20 − Q = 12 + Q → 2Q = 8 → Q_social = 4.
   - Q_market (5) > Q_social (4): the market produces too much.
4) Economic interpretation: Because producers/consumers do not pay the external cost, too many resources are allocated to producing this good, creating deadweight loss from overproduction.

Why c is correct:
- Option c (“there is an over-allocation of resources towards this product”) directly describes the result of a negative production/consumption externality: market quantity > socially optimal quantity, so resources are over-allocated.

Why the other options are incorrect:
- a (“the equilibrium quantity traded in the market is too low”): opposite of the truth; it is too high.
- b (“a subsidy should be provided to the consumers”): subsidies increase consumption, worsening an over-allocation; a corrective tax or regulation is appropriate instead.
- d (“the price of that product must be too high”): market price typically doesn’t reflect the external cost, so the price is effectively too low relative to the true social cost, not too high.

Final confirmation: the correct answer is c. there is an over-allocation of resources towards this product.

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

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