Is this statement about negative externalities true or false?When there are negative externalities present in the production of a good, more resources are allocated to the production of the product...

Is this statement about negative externalities true or false?

When there are negative externalities present in the production of a good, more resources are allocated to the production of the product and more is produced than is efficient for society if not corrected by government.

Asked on by Mizdee

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

This statement is true.  Negative externalities lead to a situation where too many resources are allocated to the making of a given good.

When the production of a good brings about negative externalities, the true cost of the good is not factored into the cost.  For example, if a factory pollutes the water while making a product, the cost of cleaning up the pollution is not actually included in the price of the product.  This means that the price of the good is not actually as high as it should be.  If the price is lower than it should be, consumers will buy more of the good than they would if the full costs were in the price.  When consumers buy more than they should, more resources are being allocated to the production of that good.

Therefore, this statement is true.

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