12. The existence of negative externalities in consumption results in a misallocation of resources. This is because at the free market level of output the
- A marginal private benefit is greater than the marginal private cost.
- B marginal private cost is greater than the marginal social cost.
- C marginal social benefit is less than the marginal social cost.
- D marginal social cost is less than the marginal private benefit.
Negative Production externality diagram
The free market equilibrium is at Q1 (where D=S)
- But at Q1 the SMC is greater than the PMC
By the way – Social efficiency occurs where SMC = SMB (at Q2)
Negative consumption externality
Free market equilibrium is Q1 (D=S) But at Q1, the SMB is less than SMC. (shown by deadweight welfare loss)
(Social efficiency occurs at Q2 where SMC=SMB)