Question

If an activity yields negative externalities, such as pollution, the socially optimal quantity in a market is:

a) Equal to the quantity that maximizes private benefits.
b) Determined solely by the government without any market involvement.
c) Greater than the quantity that maximizes private benefits.
d) Lesser than the quantity that maximizes private benefits.

Answer 1

The socially optimal quantity in a market with negative externalities, such as pollution, is lesser than the quantity that maximizes private benefits.

Step-by-step explanation:

When an activity yields negative externalities, such as pollution, the socially optimal quantity in a market is lesser than the quantity that maximizes private benefits. This is because the market fails to account for all the social costs of pollution, resulting in an inefficient output. The social costs of production exceed the social benefits to consumers, and the market produces too much of the product.