Is reduced at a lower cost than if the government set

is reduced at a lower cost than if the government set pollution standards that each firm was required to
follow.
PTS: 1 DIF: Difficult NAT: Analytic
LOC: Markets, market failure, and externalities
44. ANS:
It is only when there are no externalities that the socially optimal output is the same as the market output.
If a negative externality exists, the socially optimal output will be less than the market output (which fails
to take into account the social costs imposed by the externality). If a positive externality exists, the
socially optimal output will be greater than the market output (which fails to take into account the social
benefits created by the externality).
PTS: 1 DIF: Moderate NAT: Analytic
LOC: Markets, market failure, and externalities