When an External Cost Exists in the Production of a Good

question 260

Multiple Choice

When an external cost exists in the production of a good, firms tend to

• A) under-produce the good since society pays these costs.
• B) over-produce the good.
• C) keep production constant throughout the year.
• D) under-allocate resources to the production of the good.

---

Definitions:

Adverse Selection

A situation in which asymmetric information results in high-quality goods or high-quality consumers being squeezed out of transactions because they cannot demonstrate the quality of the product they are offering for sale.

Fair Bet

A wager in which the expected value to both parties involved is equal; no side has an advantage.

Standard 52-card Deck

A common set of playing cards used for a variety of games, consisting of four suits with thirteen ranks each.

Decreasing Slope

A downward trend on a graph indicating that one variable decreases as another variable increases.