To Move Closer to the Social Optimum When a Negative

question 12

Multiple Choice

To move closer to the social optimum when a negative externality exists, the cost to society of the externality should be:

• A)incorporated/added on to the price so that demand reflects the true social costs.
• B)calculated per unit and producers taxed accordingly with a goal of making the supply curve reflective of the marginal social cost of the externality.
• C)minimized by forcing producers of the externality to shut down when they produce a negative externality.
• D)minimized by subsidizing the producers of the externality.

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Definitions:

Contribution Margin

The difference between sales revenue and variable costs, indicating how much revenue contributes to covering fixed costs.

Fixed Costs

Expenses that do not change in total regardless of the level of production or sales activity, such as rent, salaries, and insurance.

Marginal Costs

The additional cost incurred by producing one extra unit of a product or service.

Economic Profits

Profits exceeding the opportunity costs of a next best alternative, measuring the extent to which a firm has generated excess returns over its costs, including the cost of capital.