Use the following to answer question:
Figure: Model of a Competitive Market
-(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.

Question

Use the following to answer question:
Figure: Model of a Competitive Market 
-(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.

Quizplus · Accepted Answer

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.

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