If there are external costs of production and firms do not have to account for these costs, then the firms will ________ and ________ compared with the efficient values.
A) underproduce; underprice
B) underproduce; overprice
C) overproduce; underprice
D) overproduce; overprice

Question

Quizplus · Accepted Answer

When firms do not have to account for external costs of production, they tend to produce more than the efficient level (overproduce) because they are not bearing all the costs of production. This leads to a lower price than what would be efficient (underprice) because the social costs are not reflected in the production costs.

If There Are External Costs of Production and Firms Do