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13 September, 18:01

Since air pollution creates a negative externality,

a. social welfare is optimal when all air pollution is eliminated.

b. governments should encourage private firms to consider only private costs.

c. the free market result maximizes social welfare.

d. social welfare will be enhanced when some, but not all air pollution is eliminated.

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Answers (1)
  1. 13 September, 20:54
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    A.

    If you recall, negative externalities arise when there is a divergence between marginal private cost and marginal social cost, the difference being the marginal external cost as shown from the poorly drawn diagram. If we got rid of the marginal external cost by producing less, then the externality would dissipate.

    However, the question is weird as there are no options for compensation. What would rather happen is that whoever has the property rights will be compensated the size of the MEC and there would be social welfare, whereas the question only tackles removing the externality through stopping production.
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