Why does an external cost lead to inefficient overproduction?
What will be an ideal response?
If there is an external cost, then the market supply curve represents only the private costs rather than the total costs of production. Private producers respond only to the costs that they pay. In the case of an external cost, because producers are not paying all of the costs, they produce too much of the good from the social perspective, that is, there is overproduction. Thus government policies, such as taxes, emission charges, or marketable permits, that mean the producers pay all the costs of their production move the market toward efficiency.
You might also like to view...
The multiplier is calculated as the change in ________ divided by the change in ________
A) real GDP; induced spending B) nominal GDP; autonomous expenditure C) real GDP; autonomous expenditure D) autonomous expenditure; real GDP
When the price of a good falls, consumers may increase the quantity consumed because they have greater total purchasing power. This statement describes the:
A. substitution effect. B. income effect. C. consumer equilibrium effect. D. price effect.
Refer to the diagram. If labor is the only variable input, the marginal product of labor is at a:
A. maximum at point a.
B. minimum at point a.
C. maximum at point b.
D. minimum at point b.
If real GDP rises, then so must nominal GDP.
Answer the following statement true (T) or false (F)