Asked by Kevin Rodrigues on Jul 24, 2024
Verified
If there are external costs of production and firms do not have to account for these costs, then the firms will ________ and ________ compared with the efficient values.
A) underproduce; underprice
B) underproduce; overprice
C) overproduce; underprice
D) overproduce; overprice
External Costs
Costs created by an activity that affect other parties without them being reflected in the market prices, similar to negative externalities.
Production
The process of creating goods and services through the combination of labor, materials, and capital.
- Acquire insight into the idea of externalities and their repercussions on societal well-being.
Verified Answer
RC
Rumbi ChinamhoraJul 31, 2024
Final Answer :
C
Explanation :
When firms do not have to account for external costs of production, they tend to produce more than the efficient level (overproduce) because they are not bearing all the costs of production. This leads to a lower price than what would be efficient (underprice) because the social costs are not reflected in the production costs.
Learning Objectives
- Acquire insight into the idea of externalities and their repercussions on societal well-being.