📚 Learning Guide
Externality Graphs in Economics
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In an externality graph illustrating pollution from copper production, what is the primary reason for the divergence between marginal private cost and marginal social cost?

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Choose the Best Answer

A

Producers do not account for the environmental damage caused by their production

B

Consumers are willing to pay a higher price for copper

C

Government regulations eliminate the need for external costs

D

The market is perfectly competitive without any external effects

Understanding the Answer

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Answer

In an externality graph showing pollution from copper production, the main reason for the difference between marginal private cost and marginal social cost is that the private cost only considers the expenses incurred by the producer. However, the social cost includes both the private costs and the additional costs that society faces due to pollution, like health problems and environmental damage. For example, if a copper factory produces metal at a cost of $100, but the pollution it creates leads to $50 in health care costs for nearby residents, the marginal social cost would be $150. This gap shows how the producer does not take full responsibility for the negative effects of their production, leading to overproduction of copper. Understanding this difference helps policymakers decide how to address these external costs, like through taxes or regulations.

Detailed Explanation

Producers often ignore the harm they cause to the environment. Other options are incorrect because This answer suggests that higher prices for copper are the main issue; This option implies that government rules fix all problems.

Key Concepts

Externalities
Marginal Costs
Market Efficiency
Topic

Externality Graphs in Economics

Difficulty

medium level question

Cognitive Level

understand

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