Question 67 of 80 If the production of a good pollutes the environment, which of

Question

Question 67 of 80 If the production of a good pollutes the environment, which of the following is true? O The price of the good in an unregulated market exceeds the socially efficient price. O The social marginal cost of production exceeds the private marginal cost of production. Aper unit tax on the good will necessarily lead to a further loss ofefficiency. The private market produces too little of the good, necessitating a subsidy to reach the efficient level ofoutput There is no economic justification for continuingproduction.

Explanation / Answer

Correct option is (2).

When the production process leads to pollution, which is a negative externality, it gives rise to a marginal external cost (MEC), which increases private marginal cost (PMC) as follows:

Social marginal cost (SMC) = PMC + MEC

Since MEC > 0, SMC > PMC.

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