Question

Suppose electricity generates a negative externality in production. If​ so, then ____

(A) the marginal social cost of electricity equals the marginal private cost.
(B) the marginal social cost of electricity is less than the marginal private cost.
(C) the marginal social cost of electricity is greater than the marginal private cost.
(D) the marginal social cost of electricity equals the marginal social benefit.
(E) the marginal social benefit of electricity is less than the marginal private benefit.

Answer 1

C

Step-by-step explanation:

The marginal social cost of electricity is greater than the marginal private cost because a negative externality in production means that the social cost is larger than the cost it is required to provide the good or service.

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Answer 2

The correct answer is option A.

Step-by-step explanation:

A negative externality refers to the situation when the cost of production is borne by a third party which is not involved in the production process.

In case there is a negative externality present, the marginal social cost will be greater than the marginal private cost. The competitive price will be lower than the socially optimal price.

Since a third party partially bears the cost, the producer will be able to produce more than the optimal level. There will be a deadweight loss of social welfare.