In terms of cost-benefit analysis, explain why a competitive market with an externality produces too much pollution
What will be an ideal response?
At the socially optimal level of production, welfare is maximized and the marginal benefit from less pollution equals the marginal cost of less output. However, a competitive market with an externality produces more pollution than is socially optimal, because the competitive producers only get a fraction of the marginal benefit of less pollution, but must pay the full marginal cost of less production.
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In the long run, an increase in productivity would cause output to ________ and the aggregate price level to ________
A) fall; rise B) fall; fall C) rise; fall D) rise; rise
If the world supply of diamonds increases, the market price of diamonds decreases, and the consumer surplus derived by diamond consumers increases
a. True b. False Indicate whether the statement is true or false