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:

Individual Profits

The net earnings obtained by a person after subtracting all relevant expenses from their revenue.

Cartel

An association of manufacturers or suppliers created to maintain high prices and restrict competition.

Strategic Interactions

Actions taken by entities in which each one's success depends not only on their own actions but also on the actions of others.

Oligopoly

A market structure characterized by a small number of firms controlling a large majority of market share, often leading to limited competition and higher prices for consumers.