If a good that generates negative externalities were priced to take these negative externalities into account, its

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BlackTom AI · Accepted Answer

Contextualizing the question: when a good with negative externalities is priced to internalize those externalities, we adjust the market so that the social costs align with private costs.
Option A: 'price would decrease, and its output would increase.' This goes against the standard effect of internalizing externalities. If negative externalities are priced in, costs to producers rise, typically leading to a higher price rather than a lower one, and output tends to fall due to reduced demand or higher marginal cost.
Option B: 'price would remain constant and output would increase.' Keeping price constant ignores the added social cost and does not reflect the economic mechanism of internalization. The presence of a tax or price on the externality would alter costs and usually compress output, not increase it.
Option C: 'price increase but output remains constant.' While the price part is plausible, the assumption that output remains constant ignores the normal downward pressure on quantity when price rises and external costs are internalized. In most models, higher marginal cost or lower net benefit reduces quantity.
Option D: 'price would increase, and its output would decrease.' This aligns with the standard outcome of internalizing negative externalities: the social cost is reflected in the market, producers face higher costs or taxes, prices rise, and the quantity produced (output) falls as some potential production is no longer socially optimal at the higher price.
Thus, the combination of a higher price and a reduced output best reflects the internalization of negative externalities in a market for a good.

If a good that generates negative externalities were priced to take these negative externalities into account, its

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