Exhibit 30-1 ​ Refer to Exhibit 30-1. This Graph Represents a Negative Externality

Multiple Choice

Exhibit 30-1 ​

Refer to Exhibit 30-1. This graph represents a negative externality situation. Given this, which of the two curves, X or Y, represents marginal social costs and why?

A) Curve X, because if there is a negative externality, external costs are associated with it: social costs = external costs + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve.
B) Curve Y, because if there is a negative externality, negative external costs are associated with it: social costs = negative external costs + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve.
C) Curve X, because if there is a negative externality, external benefits are associated with it: social costs = external benefits + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve.
D) Curve Y, because if there is a negative externality, negative external benefits are associated with it: social costs = negative external benefits + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve.