The market failure of external cost is most likely to result if Peanuts 'R' Us:
A) keeps secret a discovery that excessive consumption of peanut butter causes nearsightedness.
B) discards broken peanut shells on to an adjacent recreational area in the production of peanut butter.
C) is subject to performance standard regulations by the PBRC (Peanut Butter Regulatory Commission).
D) develops a new peanut butter processing machine that enhances competition.

Question

Quizplus · Accepted Answer

Discarding broken peanut shells on to an adjacent recreational area causes harm to the environment and the people using it, resulting in external costs. It is a market failure as Peanuts 'R' Us is not paying for these costs and therefore not taking them into account while pricing their product. Keeping a discovery secret (A) does not result in any external costs, and being subject to regulations (C) helps to prevent market failure. Developing a new machine (D) does not directly relate to external costs.

The Market Failure of External Cost Is Most Likely to Result