If firms have to account for external costs of production, then they will ________ compared with what they would do if they did not have to account for the external costs.
A) underproduce and underprice
B) underproduce and overprice
C) overproduce and underprice
D) overproduce and overprice

Question

Quizplus · Accepted Answer

When firms have to account for external costs of production, such as pollution, they will likely produce less to minimize these costs and charge higher prices to cover the additional expenses associated with mitigating or compensating for these externalities. This leads to underproduction and overpricing compared to a scenario where these costs are ignored.

If Firms Have to Account for External Costs of Production