CIMA BA1 · Chapter 8 · Question 2 of 9
Where the production of a good creates a negative externality such as pollution, a free market will tend to:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Overproduce the good because marginal social cost exceeds marginal private cost
Explanation
Firms take account only of their private costs. With a negative externality, the cost to society is higher than the private cost, so output where demand meets private supply is greater than the socially optimal output where marginal social benefit equals marginal social cost.
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