Question

In the absence of government intervention, a profit-maximizing firm producing a good with an external cost will produce a quantity at which

A) price is greater than marginal private cost.
B) price is less than marginal revenue.
C) price is less than marginal private cost.
D) price equals marginal private cost.
E) marginal revenue equals marginal social cost.

Answer 1

In the absence of government intervention, a profit-maximizing firm producing a good with an external cost will produce a quantity at which price is less than marginal private cost. This allows the firm to minimize its costs and maximize its profits.

Step-by-step explanation:

In the absence of government intervention, a profit-maximizing firm producing a good with an external cost will produce a quantity at which price is less than marginal private cost.

This is because the firm is considering only its own costs and not taking into account the external costs imposed on society. By producing at a quantity where price is less than marginal private cost, the firm can maximize its profits by minimizing its costs.

For example, if a firm is producing a good that creates pollution as an external cost, it may choose to produce less than the socially optimal quantity in order to reduce its costs and maximize profits.