A Plausible Example of Market Failure Due to an Externality

question 79

Multiple Choice

A plausible example of market failure due to an externality is

• A)the cost of building new highways outside of major cities.
• B)the despoiling of rivers and lakes by nitrogen run-off from agricultural fertilizers.
• C)the high salaries enjoyed by professional athletes.
• D)the line-ups at the theatre when a good movie is playing.
• E)a farmer with an apple orchard who also keeps bees.

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Definitions:

Actual Costs

The real costs incurred in the production of goods or provision of services, as opposed to estimated or standard costs.

Direct Materials Price Variance

The difference between the actual cost of direct materials used in production and the standard cost, multiplied by the actual quantity of materials used.

Direct Labor Rate Variance

The difference between the actual cost of direct labor and the expected (or standard) cost, used in variance analysis to control labor costs.

Direct Materials Cost Variance

The difference between the budgeted cost of materials for products and the actual cost incurred.