In the presence of a negative externality generated by producing a good, a competitive market will produce more of that good than is socially optimal
What will be an ideal response?
True. Firms in that market only consider their private costs and produce a quantity that equates price with the private marginal cost. Producers ignore the external costs to others. As a result, p = MCp instead of p = MCs.
You might also like to view...
Outcomes are likely to be Pareto superior if they were _____
a. approved of by a unanimous vote b. enacted by a bureaucrat c. decreed by a judge d. enacted by bipartisan legislation
If a budget deficit increases interest rates, it is possible that investment will
a. fall, leading to a larger capital stock. b. fall, so that there is a smaller capital stock. c. rise, because investment is directly related to interest rates. d. rise, because investment is more attractive when interest rates are higher.
A person who is employed in a service industry tends to have ______ wage rate as someone employed in manufacturing.
A. a higher B. about the same C. a lower
Suppose that production for good X is characterized by the following production function, Q = K0.5L0.5, where K is the fixed input in the short run. If the per-unit rental rate of capital, r, is $15 and the per-unit wage, w, is $5, then the average fixed cost of using 16 units of capital and 25 units of labor is:
A. $9. B. $56. C. $12. D. There is insufficient information to determine the average fixed costs.