A buyer values a good at $60 while the good costs a seller $50 to make and sell.The good is sold for a price of $55.Making the good results in pollution that harms people not directly involved in the transaction.When will this transaction result in a market failure?
A) Only when the cost of the pollution exceeds $10.
B) When the pollution has any cost.
C) Only when the cost of pollution exceeds $5.
D) Only when the cost of pollution exceeds $60.

Question

Quizplus · Accepted Answer

The transaction results in a market failure when the external cost (pollution) exceeds the net gain from the transaction, which is $10 ($60 value to buyer - $50 cost to seller).

A Buyer Values a Good at $60 While the Good