When Negative Externalities Exist in the Production of a Good

question 139

Multiple Choice

When negative externalities exist in the production of a good, the marginal social cost of producing the good:

• A) is equal to the marginal benefit received by consumers if competitive markets exist and there is no government intervention.
• B) equals the marginal cost borne by the firm minus marginal cost borne by a third party that results from the production and consumption of the good.
• C) is less than the marginal cost borne by the firm.
• D) equals the marginal cost borne by the firm plus the marginal cost borne by third parties from the production and consumption of the good.

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Definitions:

Purely Competitive

A market structure characterized by many buyers and sellers, free entry and exit, and a product so standard that no one controls the market price.

Imperfectly Competitive

A market structure characterized by a few dominant firms that have control over prices and high barriers to entry, limiting perfect competition.

Marginal Product

The increase in output that results from a one-unit increase in the quantity of a single input, keeping all other inputs constant.

Wage Rate

The fixed amount of compensation paid to an employee by an employer in exchange for work performed, typically expressed on an hourly, daily, or piecework basis.