Question

If the production of a good creates pollution, then the

A) marginal social benefit curve lies above the marginal private benefit curve.
B) marginal social cost curve lies above the marginal private cost curve.
C) marginal social benefit curve lies below the marginal private benefit curve.
D) marginal social cost curve lies below the marginal private cost curve.
E) marginal social benefit curve intersects the marginal private cost curve at the efficient quantity.

Answer 1

When the production of a good creates pollution, the marginal social cost curve lies above the marginal private cost curve, and the government can try to increase production and sales of fuel-efficient cars to the socially desirable amount by imposing regulations that internalize the external costs.

Step-by-step explanation:

When the production of a good creates pollution, the marginal social cost curve lies above the marginal private cost curve, which can be represented by option B.

Since pollution is an externality, it creates social costs that are not accounted for by the private market. The marginal social cost takes into account both the private costs of the producer and the external costs imposed on society.

In the case of fuel-efficient cars, if the marginal private costs are greater than the marginal social costs, it means that the private market underestimates the true costs of production. The government can try to increase production and sales of fuel-efficient cars to the socially desirable amount by imposing regulations that internalize the external costs, such as implementing a carbon tax or setting emissions standards.