A factory imposes pollution costs on nearby residents that are not included in its private production costs. At the efficient output, which condition is expected?
Correct answer: B. Marginal social cost exceeds marginal private cost
- A. Marginal private cost equals marginal social cost
- B. Marginal social cost exceeds marginal private cost
- C. Marginal private benefit exceeds total benefit
- D. Marginal revenue equals average fixed cost
Explanation
Pollution is a negative externality, so marginal social cost includes both the firm's private cost and the external cost imposed on others. Consequently, marginal social cost exceeds marginal private cost at the relevant output.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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