How does the marginal social cost curve behave in the presence of negative externalities?

In the context of negative externalities, the marginal social cost curve lies above the supply curve. This is because negative externalities represent costs that are not reflected in the market price. For example, when a factory produces goods, the supply curve reflects the private costs of production—for instance, labor and materials. However, if the production process generates pollution, it imposes additional costs on society that the private producers do not account for in their decision-making.

The marginal social cost curve incorporates these external costs, which results in it being positioned above the supply curve. This indicates that the true cost to society for producing additional units of the good is greater than the cost to the producers alone due to the negative externalities involved. When accounting for these additional social costs, the overall impact on society is more significant, prompting the need for interventions such as taxes or regulations to align private incentives with social welfare. This adjustment is crucial for ensuring that the production levels reflect the true costs, leading to a more efficient allocation of resources.