Negative Externalities from Production

Which of the following is not true?

• The market fails when community surplus is maximised at the point of market production.

• The market fails when there is an inefficient allocation of resources resulting from the forces of demand and supply.

• The market fails when the market outcome results in an over- or under-production of a good or service with respect to the socially optimal output.

• The market fails when there is a difference between private costs or benefits and social costs or benefits at the point of production.

Define a merit good.

• A good that has positive consequences for society when produced

• A good that is non-rivalrous and non-excludable

• A good that has positive consequences for society when consumed

• A good that has negative consequences for society when consumed

The following sentence describes which type of market failure? 

A type of good that has ill effects for third parties when consumed.

Looking the figure, when there is a negative externality of production, there is a social welfare loss because:

• The MSC is greater than the MPC for each of the units from Q₂ to Q₁.

• The extra units produced have a higher cost to society than the benefit they bring to it.

• More units of the good are produced than the socially optimal output.

• All of the proposed options are correct.

Difficulty:   

A negative externality of production is a situation where:

• MPB > MSB at every level of output.

• MPC > MSB at every level of output.

• MSC < MPC at every level of output.

• MSC > MPC at every level of output.

When there is a negative externality of production there is an ____________ allocation of resources to the production of the good, from the society's point of view.