Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, the equilibrium price:

A) and output are too low to be optimal.
B) and output are too high to be optimal.
C) is too low to be optimal, and equilibrium quantity is too high.
D) is too high to be optimal, and equilibrium quantity is too low.
E) is optimal, but there is an excess supply.

Question

Tyler Frank · Accepted Answer

Final Answer : C, Explanation :  The presence of air pollutants in the process of dry cleaning causes a negative externality, which leads to an overconsumption of dry cleaning services at the market equilibrium. Therefore, the equilibrium price is too low to be optimal, and the equilibrium quantity is too high. The optimal level of output would be lower, and the price would be higher in order to reflect the true cost of production that includes the negative externalities.

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