Which of the following statements is true of external costs?
A) External costs should not be corrected since people will bear the costs whether they are corrected or not.
B) There are no good ways to correct for the external costs.
C) When external costs exist, the price of the good will be deceptively low leading to an overallocation of resources.
D) External costs should only be corrected for if the correction will not increase the market price.

Question

Quizplus · Accepted Answer

External costs refer to the costs of a transaction that are not borne by the parties involved in the transaction. When external costs exist, the price of the good will be deceptively low which will lead to an overallocation of resources. This is because the price does not reflect the true cost of production, and therefore, resources may be allocated towards the production of goods that are not socially desirable. It is important to correct for external costs through policies such as taxation or regulations to ensure that the price of goods accurately reflects the true cost of production.

Which of the Following Statements Is True of External Costs