5 For a negative externality which of the following is true

5) For a negative externality, which of the following is true?

i) MSC = MEC - MCp

ii) MCp < MSC

iii) MSC < 0

iv) MEC < 0

Solution

Negative externality condition:

Marginal social costs (MSC)

=Marginal external cost (MEC)+ Marginal Private cost (MPC).

Hence option first is the correct answer.But I think there is mistake in sign. It should be positive sign instead of negative sign.

Option (i) is MSC=MEC+MPC