In the presence of a negative externality, which curve represents the true social marginal cost?

• A. Social marginal cost (MSC).
• B. Private marginal cost (PMC).
• C. Average total cost (ATC).
• D. Private marginal benefit (PMB).

Answer: (A)

When a negative externality exists, producing an extra unit imposes costs on others that the producer doesn’t pay. The private marginal cost only reflects the producer’s own costs, not these external damages. To capture the total cost to society, you add the external cost per unit to the private cost. That sum is the social marginal cost, which sits above the private marginal cost curve. So the true social marginal cost is represented by the MSC curve. The other curves don’t reflect this broader view: average total cost is just average, not the social cost per unit; private marginal benefit is a benefit measure, not a cost; and private marginal cost omits external damages.