Question

When production of a good generates external costs, the

a. demand curve for the good will overstate the true social benefits from consumption of the good.

b. demand curve for the good will understate the true social benefits from consumption of the good.

c. supply curve for the good will overstate the true social cost of producing the good.

d. supply curve for the good will understate the true social cost of producing the good?

Answer 1

D. supply curve for the good will understate the true social cost of producing the good

External costs are things other than what the business bases its price on like cost of disposing of a product when it is no longer useful, environmental impact, etc. When there are significant external costs the supply curve will be understated because it is only based on internal costs.