The expected damage to innocent third parties per unit of the good produced is shown as the "external cost" in Figure 27.1. An unregulated competitive market for the product produces a quantity of Q* units, which sell for a price of P* per unit. The competitive industry would produce the socially optimal quantity of this product if the expected per unit cost to producers of this product due to just and reasonable lawsuits were 

A. greater than the external cost.
B. equal to the external cost.
C. greater than zero but less than the external cost.
D. zero.


Answer: B

Economics

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