Final answer:
The social cost is above the supply curve in economic analysis of externalities because externalities, such as pollution, cause the market to produce too much of the product. This leads to an imbalance between social costs and benefits, resulting in market failure. The correct answer to the student's question is that B) .
Step-by-step explanation:
When the externality of pollution exists, the supply curve no longer represents all social costs. Externalities represent a case where markets no longer consider all social costs but only some of them, leading to market failure. In the case of pollution, at the market output, social costs of production exceed social benefits to consumers, and the market produces too much of the product. Therefore, the social cost is above the supply curve in economic analysis of externalities.
The social cost is above the supply curve in economic analysis of externalities because the supply curve only accounts for private costs, not external costs borne by society, such as pollution, leading to market failure and inefficient market output.
The social cost is above the supply curve because the supply curve does not consider external costs, such as pollution, that are borne by society but not reflected in the firm's production costs. The correct answer to the student's question is that B) The supply curve reflects the full cost to society is not accurate, but rather the opposite is true. Thus, the supply curve only represents the private costs of production, not the full social costs, which include these unaccounted-for externalities. When such externalities are present, markets can not coordinate social costs and benefits effectively, leading to market failure. As a result, the market output does not achieve what can be considered an efficient outcome because it overproduces goods that generate negative externalities, like pollution, creating a social cost that is higher than what is depicted by the supply curve.