When External Costs Result from the Production of a Good

question 45

Multiple Choice

When external costs result from the production of a good,

• A)Producers have an incentive to produce too little.
• B)Consumers have an incentive to consume too little.
• C)Both producers and consumers have an incentive to produce and consume too much.
• D)Producers and consumers are not affected.

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Definitions:

Willingness to Pay

Willingness to Pay is the maximum amount an individual or organization is ready to spend to procure a product or service, reflecting the value they attach to it.

Market Failure

A scenario in which the distribution of goods and services through a free market fails to be efficient, typically resulting in a decrease in overall social welfare.

Producer Surplus

The difference between what producers are willing to sell a good for and the actual price they receive, representing their gain.

Firm's Willingness

Refers to a company's readiness to engage in activities like selling at certain prices or producing specific quantities.