If the Production of a Good Created Both External Costs

question 83

Multiple Choice

If the production of a good created both external costs and external benefits, but the external costs were greater, without government intervention, a market economy will:

• A)​not produce the product at all.
• B)​overproduce the product.
• C)​underproduce the product.
• D)​produce the optimal amount of the product.

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Definitions:

Fed Tightened

Refers to the Federal Reserve's actions to reduce the money supply and raise interest rates to control inflation.

Monetary Policy

The actions of a central bank, currency board, or other regulatory committees that determine the size and rate of growth of the money supply, which in turn affects interest rates.

Inflation

An increase in the general price level of goods and services in an economy over a period of time, leading to a decrease in the purchasing power of money.

Time Inconsistency

Refers to the situation where a decision-maker's preferences change over time, so that what is preferred at one point in time is inconsistent with what is preferred at another time.