"If Production of a Good Creates an External Cost, Then

question 285

Essay

"If production of a good creates an external cost, then, when production is such that the marginal private costs are equal to the marginal private benefits, the market outcome will be inefficient." Explain whether this assertion is correct or incorrect.

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Definitions:

Direct Materials Price Variance

The difference between the actual cost and the standard cost of direct materials used in production, indicating how effectively the materials budget is being adhered to.

Per-Unit Standards

Estimates of the direct materials, direct labor, and manufacturing overhead costs required to produce one unit of a product.

Direct Labor Price Variance

The difference between the actual cost of direct labor and the expected (or standard) cost of direct labor used during production.

Direct Labor Payroll

The total amount of money paid to employees directly involved in manufacturing products or providing services.