Asked by Najia Calhoun on Jun 03, 2024
Verified
(Figure: Model of a Competitive Market) Use Figure: Model of a Competitive Market.Given the figure,if there are external costs:
A) resources will be underallocated to the production of the good.
B) resources will be overallocated to the production of the good.
C) resources will be efficiently allocated to the production of the good.
D) the price at P will be higher than if there were no external costs.
External Costs
Costs of a transaction or activity that affect people other than those directly involved in the transaction, not accounted for in the market price.
Competitive Market
A market structure characterized by a large number of firms competing against each other, leading to efficient prices and products.
Resources
Assets, materials, and inputs needed to produce goods and services.
- Apprehend the notion of market efficiency and observe the effects of externalities on the functionality of markets.
- Analyze the impact of government intervention on market equilibrium, including taxes and subsidies.
Verified Answer
CD
Christopher DarbyJun 07, 2024
Final Answer :
B
Explanation :
When there are external costs (also known as negative externalities), it means that not all costs of production are reflected in the supply curve. This typically leads to a situation where more of the good is produced and consumed than would be the case if the external costs were taken into account. As a result, resources are overallocated to the production of the good, because the market does not account for the external costs, leading to a higher level of production and consumption than is socially optimal.
Learning Objectives
- Apprehend the notion of market efficiency and observe the effects of externalities on the functionality of markets.
- Analyze the impact of government intervention on market equilibrium, including taxes and subsidies.