If there are significant external costs associated with the production of a product, it can be said that the private cost of production to the firm ____ the cost to society associated with this product and output should ____ to move toward the efficient situation.
A)overstates; increase
B)understates; increase
C)overstates; decrease
D)understates; decrease

Question

If there are significant external costs associated with the production of a product, it can be said that the private cost of production to the firm ____ the cost to society associated with this product and output should ____ to move toward the efficient situation.
A)​overstates; increase
B)​understates; increase
C)​overstates; decrease
D)​understates; decrease

Quizplus · Accepted Answer

The private cost of production understates the true cost to society because it does not include external costs. To achieve efficiency, output should decrease to account for these external costs.

If There Are Significant External Costs Associated with the Production