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Author Question: Why does the presence of negative externalities in the production of a good lead to an ... (Read 84 times)

mydiamond

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on: Jun 29, 2018
Why does the presence of negative externalities in the production of a good lead to an overproduction of the good?
 
  What will be an ideal response?

Question 2

The above table shows production combinations on a country's production possibilities frontier. Which of the following points signifies efficient production?
 
  A) 0 units of good X and 40 units of good Y
  B) 3 units of good X and 25 units of good Y
  C) 10 units of good X and 16 units of good Y
  D) 12 units of good X and 1 unit of good Y


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beccamahon

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Reply #1 on: Jun 29, 2018
Answer to Question 1

If the production of a good generates negative externalities, the marginal social cost of producing the good exceeds the marginal private cost of producing the good. However, the producers of the good do not take this external cost into account and continue producing as long as the marginal private benefit from production exceeds the marginal private cost. This leads to an overproduction of the good.

Answer to Question 2

A


mydiamond

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Reply 2 on: Jun 29, 2018
Gracias!

komodo7

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Reply 3 on: Yesterday
Excellent

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