If a negative externality results from the refining of oil, what can be said of the cost of production as seen by the oil refinery?
A) It does not include the external cost.
B) It includes the external benefit.
C) It includes the external cost.
D) It does not include the external benefit.

Question

Quizplus · Accepted Answer

The cost of production as seen by the oil refinery does not include the negative externality cost because it is borne by society and the affected individuals, businesses, or the environment. The refinery is only concerned with its private costs of production, such as labor, raw materials, energy, and capital, and seeks to maximize its profits. Therefore, unless there is some government intervention or market mechanism to internalize the external cost, the refinery will continue to produce at levels that generate negative externalities.

If a Negative Externality Results from the Refining of Oil