If there are significant external costs associated with the production of a product, it can be said that the private cost of production to the firm understates the cost to society associated with this product. In order to move towards efficiency, what should happen to output?
A) It should decrease.
B) It should increase.
C) It should stay the same.
D) It should cease.

Question

Quizplus · Accepted Answer

If the private cost of production understates the cost to society, it means that the firm is not fully paying for the external costs associated with the production. In order to move towards efficiency, the output should decrease so that the external costs are reduced, and the overall cost to society is minimized. By reducing the output, the firm can reduce the negative impact of the production on society, and this can lead to a more efficient allocation of resources.

If There Are Significant External Costs Associated with the Production