In the Case of a Negative Externality

question 41

Multiple Choice

In the case of a negative externality,

• A) marginal external costs are greater than marginal private costs.
• B) marginal external costs are less than marginal private costs.
• C) marginal external benefits are greater than marginal private benefits.
• D) marginal external benefits are equal to marginal private costs.
• E) none of the above

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Definitions:

Capital Budgeting Technique

A process of evaluating and comparing the potential expenditures or investments which are significant in amount, to determine their worthiness for funding.

Present Valued Dollar

The current value of a future sum of money or stream of cash flows given a specified rate of return.

Internal Rate of Return

A financial metric used to evaluate the profitability of potential investments, calculated as the rate of return that makes the net present value of all cash flows from a particular project equal to zero.

Reinvestment Assumption

The premise in finance that cash flows received from an investment will be reinvested at a certain rate, affecting future cash flows and the overall return.