When a business produces a product that creates external costs
A)the company produces a level of output larger than would be produced without the external cost.
B)the company produces a level of output smaller than would be produced without the external cost.
C)the company produces a level of output which would be the same as it would produce without the external cost.
D)the market provides the efficient level of output even with the existence of the external cost.

Question

Quizplus · Accepted Answer

When a business produces a product that creates external costs, the company produces a level of output larger than would be produced without the external cost. This is because the external costs are not reflected in the market price, so the company does not have to bear the full cost of producing the product. As a result, the company may produce more of the product than it would if it had to pay for all of the costs associated with it.

When a Business Produces a Product That Creates External Costs