When production or consumption of a product causes negative effects on third parties, we say that

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BlackTom AI · Accepted Answer

The question asks about a situation where production or consumption of a product imposes negative effects on third parties. This is a classic case of negative externalities in economics.
Option a: 'there is an over-allocation of resources towards this product.' This is correct because negative externalities mean social costs exceed private costs, leading the market to produce too much of the good relative to the social optimum. In other words, resources are allocated more toward the externality-causing good than is socially desirable.
Option b: 'the equilibrium quantity traded in the market is too low.' This statement is false in the presence of negative externalities. The market tends to overproduce, not underproduce, because producers do not bear the full social costs of production.
Option c: 'the price of that product must be too high.' This is incorrect because the market price typically does not reflect the full social cost; consumers end up paying a price that understates the true social cost, not overstating it. The price being too high would reduce production, which is not the characteristic outcome of a negative externality.
Option d: 'a subsidy should be provided to the consumers of that product.' This is incorrect in the context of negative externalities. Subsidies to consumers would encourage more consumption, worsening the externality. Policy responses usually involve taxes or regulations that raise private costs to align with social costs, or other corrective measures like Pigovian taxes rather than subsidies.

MUF0061 Economics Unit 1 - Semester 2, 2025 Revision Quiz: Externalities (5 - 10 minutes)

When production or consumption of a product causes negative effects on third parties, we say that

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