The market failure of external cost is most likely to result if Peanuts 'R' Us:
A) keeps secret a discovery that excessive consumption of peanut butter causes nearsightedness.
B) discards broken peanut shells onto an adjacent recreational area in its production of peanut butter.
C) is subject to performance standard regulations by the PBRC (Peanut Butter Regulatory Commission).
D) develops a new peanut butter processing machine that enhances competition.

Question

Quizplus · Accepted Answer

Discarding broken peanut shells onto an adjacent recreational area creates a negative externality (pollution) that affects individuals not directly involved in the production or consumption of peanut butter. This external cost is not reflected in the market price of peanut butter, leading to market failure.

The Market Failure of External Cost Is Most Likely to Result