Assume that the production of a good imposes external costs upon third parties. If the price and quantity of this good is set by supply and demand the price will be too:
A) high and quantity too low for efficient resource allocation.
B) low and quantity too low for efficient resource allocation.
C) low and quantity too high for efficient resource allocation.
D) high and quantity too high for efficient resource allocation.

Question

Quizplus · Accepted Answer

When external costs are present, the market price is too low and the quantity produced is too high, leading to overproduction and inefficient resource allocation.

Assume That the Production of a Good Imposes External Costs