When a negative externality exists, the private market produces a. products at a high opportunity cost. b. products at a low opportunity cost. c. more than the economically efficient output level. d. less than the economically efficient output level.

: The correct answer is the letter c. “More than the economically efficient output level”.

Explanation:

An externality happens when activities of one economic agent affect the activities of another economic agent, in a way that is not reflected in prices. When there is externality, the price of a good does not reflect its social value, that is, companies can produce excessive or insufficient quantities, making the market inefficient. Negative externality concerns, for example, when a company has a higher production generating externality in the production of another company, that is, negatively affecting the production of this company. Thus, the output of the company that generated negative externality is higher than it should be. One solution to this problem is to tax the company that generates externality.