If a Negative Externality Prevails in a Competitive Market for Air

question 9

Multiple Choice

If a negative externality prevails in a competitive market for air travel, then:

• A)more than the efficient amount of annual air travel will be consumed in equilibrium.
• B)less than the efficient amount of annual air travel will be consumed in equilibrium.
• C)the marginal social cost of air travel will exceed its marginal social benefit in equilibrium.
• D)both (a) and (c) are correct

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Definitions:

Business Risk

The exposure a company or investor has to various factors that can lower its profits or lead to a loss.

Indirect Bankruptcy Costs

Costs associated with bankruptcy that do not involve direct cash payments, such as damage to a company's reputation or loss of customers.

Optimal Capital Structure

The most favorable mix of debt and equity financing that minimizes the cost of capital and maximizes the value of the firm.