QQuestionEconomics
QuestionEconomics
"When negative externalities are present in a market:
A. The market will still maximize total benefits.
B. Demand will be too high.
C. Overproduction will occur.
D. Producers will be affected, but not consumers."
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Answer
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Step 1:Let's solve this economics problem step by step:
Step 2:: Understanding Negative Externalities
Negative externalities occur when the production or consumption of a good creates an external cost to third parties not involved in the market transaction. This means the social cost of the good is higher than the private cost.
Step 3:: Analyzing Market Equilibrium with Negative Externalities
When negative externalities are present, the market will produce more of a good than is socially optimal. This is because the market price does not reflect the full social cost of production.
Step 4:: Evaluating the Given Options
A. False: The market will NOT maximize total benefits when negative externalities exist. B. False: Demand itself is not the primary issue. C. True: Overproduction will occur because the market fails to account for the additional social costs. D. False: Both producers and consumers are affected by negative externalities.
Step 5:: Explaining Overproduction
In the presence of negative externalities: - The market price is lower than the true social cost - Producers create more goods than is socially efficient - The additional units produced create external costs to society
Final Answer
Overproduction will occur. Key Explanation: Negative externalities lead to market failure where the quantity of goods produced is higher than the socially optimal level, resulting in overproduction that creates additional costs to society not reflected in the market price.
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