📚 Learning Guide
Analyzing Market Equilibrium with Externalities
easy

What happens to market equilibrium when a negative externality, such as pollution, is introduced into the market?

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Learning Path
Learning Path

Question & Answer
1
Understand Question
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3
Learn Explanation
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Choose the Best Answer

A

Market equilibrium price decreases and quantity decreases

B

Market equilibrium price increases and quantity increases

C

Market equilibrium price increases and quantity decreases

D

Market equilibrium does not change

Understanding the Answer

Let's break down why this is correct

Answer

When a negative externality like pollution is introduced into the market, it affects the market equilibrium by causing the supply curve to shift. This happens because the costs of pollution are not included in the price of the goods being produced. As a result, the true cost of production is higher than what consumers pay, leading to overproduction of the good. For example, if a factory produces cheap goods but also pollutes the air, people might buy more of those goods than they should, not considering the harmful effects of the pollution. Ultimately, this imbalance can lead to too much of the harmful product being made, harming the environment and public health.

Detailed Explanation

When pollution is added to the market, it raises costs for everyone. Other options are incorrect because This option suggests both price and quantity drop; This choice says both price and quantity increase.

Key Concepts

market equilibrium
Topic

Analyzing Market Equilibrium with Externalities

Difficulty

easy level question

Cognitive Level

understand

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