Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities?
A)the private cost of production
B)the social cost of production
C)the external cost of production
D)the explicit cost of production

Question

Quizplus · Accepted Answer

When firms produce goods that cause negative externalities, the true economic cost of production is not just the private cost (A) incurred by the firm, but also includes the external cost (C) imposed on third parties who are negatively affected by the production. The social cost of production (B) takes into account both the private cost and the external cost, and is therefore the most comprehensive measure of the true economic cost of production in such cases. The explicit cost of production (D), on the other hand, only includes the direct expenses incurred by the firm, and does not account for any externalities.

Which of the Following Represents the True Economic Cost of Production