Why does an external cost lead to inefficient overproduction?
What will be an ideal response?
If there is an external cost, then the market supply curve represents only the private costs rather than the total costs of production. Private producers respond only to the costs that they pay. In the case of an external cost, because producers are not paying all of the costs, they produce too much of the good from the social perspective, that is, there is overproduction. Thus government policies, such as taxes, emission charges, or marketable permits, that mean the producers pay all the costs of their production move the market toward efficiency.
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Which of these arises when an individual listens to loud music late in the night?
a. An externality b. The free-rider problem c. An asymmetric information problem d. The common-pool problem
People who grew up in the western part of Aquilonia have an accent distinct from people who grew up in the eastern part of the country. People from the west also receive lower wages than people from the east. From this information alone, we can conclude that it is possible that
a. discrimination against people from the west exists. b. people from the east receive compensating differentials. c. people from the west have lower levels of human capital. d. All of the above could be correct.