In the case of a negative externality:
Select one:
a. the private market does not produce enough of the good.
b. market price reflects the social costs of production.
c. efficiency requires that the government impose a subsidy.
d. market price reflects only the private costs of production.
e. the market price is above the efficient price.
i have gone with b but really doubt myself?
I think you're right. The social costs are external to the transaction between producer and customer.
To determine the correct answer, let's break down each option:
a. If the private market does not produce enough of the good, it suggests that there is an underproduction, which is inconsistent with a negative externality. Therefore, option a is not correct.
b. If the market price reflects the social costs of production, it means that the price accounts for both the private costs and the external costs associated with the negative externality. This can lead to a more socially efficient outcome. In the case of a negative externality, the market price does not fully incorporate the external costs. Instead, it only reflects the private costs of production and consumption. Therefore, option b is not correct.
c. Efficiency requires the government to impose a subsidy. While it is true that subsidies can sometimes be used as a policy solution to address negative externalities, it is not a general rule. The efficiency of various policy options depends on the specific characteristics of the externality and the market. Therefore, option c is not necessarily correct.
d. If the market price reflects only the private costs of production, it implies that the external costs are not considered. This is the case with negative externalities, as the market does not fully account for the social costs imposed on third parties. Therefore, option d is correct.
e. If the market price is above the efficient price, it indicates that there is an overproduction of the good, which is not consistent with a negative externality. Therefore, option e is not correct.
In conclusion, the correct answer is d. The market price reflects only the private costs of production in the case of a negative externality.