If an industry ignores the external costs it imposes, at the competitive market equilibrium output, price will be

If an industry ignores the external costs it imposes, at the competitive market equilibrium output, price will be

• A. price will be greater than the marginal social cost
• B. price will equal the marginal social cost
• C. price will be unrelated to the marginal social cost
• D. price will be less than the marginal social cost

Answer: (D)

External costs (negative externalities) happen when production imposes costs on others that aren’t paid for by the producers. In a competitive market, the price at equilibrium reflects only the private marginal cost, not these external costs. The marginal social cost adds the external cost to the private cost, so MSC is higher than private MC for the same output. Therefore, at the market equilibrium quantity, the price equals the private marginal cost and is lower than the marginal social cost. This is why the correct statement is that price will be less than the marginal social cost.

External costs (negative externalities) happen when production imposes costs on others that aren’t paid for by the producers. In a competitive market, the price at equilibrium reflects only the private marginal cost, not these external costs. The marginal social cost adds the external cost to the private cost, so MSC is higher than private MC for the same output. Therefore, at the market equilibrium quantity, the price equals the private marginal cost and is lower than the marginal social cost. This is why the correct statement is that price will be less than the marginal social cost.