Which of the Following Statements Is True of External Costs

question 356

Multiple Choice

Which of the following statements is true of external costs?

• A) External costs should not be corrected since people will bear the costs whether they are corrected or not.
• B) There are no good ways to correct for the external costs.
• C) When external costs exist, the price of the good will be deceptively low leading to an overallocation of resources.
• D) External costs should only be corrected for if the correction will not increase the market price.

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Definitions:

Injunctions

Injunctions are legal orders issued by a court that require a party to do or abstain from doing specific acts.

Liability Rules

Legal principles that govern the allocation of costs for damages or harm among parties in civil lawsuits.

Coase Theorem

A principle stating that if trade or bargaining is possible without cost, then the allocation of resources will be efficient and invariant to the allocation of property rights.

Externality

A side effect or consequence of an economic activity that affects other parties without this being reflected in the cost of the goods or services involved.