When the Production or Consumption of a Good Involves an Externality

question 7

Multiple Choice

When the production or consumption of a good involves an externality:

• A)​resources are necessarily overallocated to the good.
• B)​resources are necessarily underallocated to the good.
• C)​someone not involved in buying or selling the good is affected.
• D)​the market will efficiently allocate resources to its production.

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Definitions:

Business Owner

An individual who owns and operates a business entity, assuming all risks and rewards of the venture.

Half-year Rule

A tax regulation allowing businesses to claim half-year depreciation for assets acquired or disposed of during a fiscal year.

Firms

Business organizations or entities engaged in commercial, industrial, or professional activities, either for profit or non-profit.

Interest Expense

The cost incurred by an entity for borrowed funds, often expressed as a yearly rate.