Once a Firm Is Made to Internalize a Negative Externality

question 199

Multiple Choice

Once a firm is made to internalize a negative externality, the price will

• A) increase and output will decrease.
• B) increase and output will increase.
• C) decrease and output will decrease.
• D) decrease and output will increase.

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Definitions:

Deadweight Loss

Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called efficiency loss.

Producer Surplus

is the difference between what producers are willing to accept for a good or service versus what they actually receive, due to market prices.

Consumer Surplus

The difference between the total amount that consumers are willing to pay and the actual amount they pay for a good or service.

Equilibrium Quantity

The quantity of goods or services that is supplied and demanded at the equilibrium price in a market.