When the Production of a Good Has an External Cost

question 109

Multiple Choice

When the production of a good has an external cost, the

• A) marginal social cost curve lies below the marginal private cost curve.
• B) marginal social benefit curve lies above the marginal private benefit curve.
• C) equilibrium quantity in an unregulated, competitive market has a marginal social cost greater than the marginal social benefit.
• D) equilibrium quantity in an unregulated, competitive market has a marginal social cost less than the marginal social benefit.

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Definitions:

Cross Elasticity

A measure of how the demand for one good responds to a change in the price of another good, indicating the degree of substitutability or complementarity between the two goods.

Complements

Goods or services that are used together, where the increase in consumption of one leads to an increase in consumption of the other.

Substitutes

Goods or services that can be used in place of each other, where an increase in the price of one leads to an increase in the demand for the other.

Elasticity Coefficient

Refers to a numerical measurement of how responsive an economic variable is to a change in another variable.