Question

When Good A is produced, pollution is also produced. When the marginal social cost of production of Good A equals marginal social benefit from Good A, then

I. there is no pollution.
II. resources are used efficiently.
A) I only
B) II only
C) neither I nor II
D) both I and II
E) sometimes I and sometimes II, but never both simultaneously

Answer 1

The correct answer is that when the marginal social cost of producing Good A equals the marginal social benefit, resources are used efficiently, but pollution likely still exists.

Step-by-step explanation:

When Good A is produced and results in pollution, it includes a negative externality in its production, which is not factored into the private costs. The question is asking when the marginal social cost (which includes the cost of pollution) of producing Good A equals the marginal social benefit from Good A, what are the outcomes. It's incorrect to presume that no pollution exists when these two are equal (option I). Instead, it is more likely that pollution does exist but is accounted for within the social costs. However, when these two margins are equal (option II), it indicates that resources are being used efficiently because the cost to society (including environmental damage) is equal to the benefit society receives from Good A. Therefore, the correct answer is B) II only, resources are used efficiently.