Question

If a profit-maximizing perfectly competitive firm does not have to compensate society for a negative externality, the firm will choose to produce where price equals marginal cost. marginal revenue equals marginal social cost. marginal cost equals marginal social cost. price equals marginal social cost.

Answer 1

In this case,the answer would be the first option or the firm will choose to produce where price equals marginal cost.

Step-by-step explanation:

• Marginal cost of production or marginal private cost of production basically refers to the total cost incurred by any firm or company from producing one unit of output or production,without compensating for any negative externality to the society due to the production process.
• Marginal social cost basically implies the total cost per unit of output produced by the firm when the firm actually financially compensates for any negative externality caused by its production or business operation.In this case,the firm will produce the output level at which the per unit price of output is equal to the marginal social cost of production.
• In this context,it is mentioned in the question that the firm does not compensate for any negative externality suffered by the society due to its production or business activities.
• Hence,in this case,the firm will produce the output level at which the per unit of price of the output will be equal to the marginal cost of production or marginal private cost of production and not the marginal social cost of production.