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 costs that are not directly borne by the producer or consumer of a good or service, but rather by society as a whole. When external costs exist, the price of the good will be deceptively low, leading to an overallocation of resources. This means that too many resources will be devoted to producing the good relative to its true social value. It is therefore important to correct for external costs in order to ensure that resources are allocated efficiently. Choices A, B, and D are all incorrect as they do not accurately describe the nature of external costs and the importance of correcting for them.

Which of the Following Statements Is TRUE of External Costs