Learning Path
Question & Answer
Choose the Best Answer
The factory's private costs are equal to its social costs
The factory does not account for the external costs of pollution
The government heavily regulates the factory's operations
The fish population is naturally declining due to climate change
Understanding the Answer
Let's break down why this is correct
The factory does not include the damage it causes to the river in its own costs. Other options are incorrect because If the factory’s costs were the same as society’s costs, it would pay for all the harm it causes; Regulation can change what a factory does, but the question is why the pollution happened in the first place.
Key Concepts
Externalities and Social Optimum
medium level question
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Deep Dive: Externalities and Social Optimum
Master the fundamentals
Definition
Externalities occur when the marginal social benefit or cost of a good differs from the private benefit or cost. The socially optimal output level accounts for externalities, aiming to align production with maximum social welfare by considering all costs and benefits. Understanding externalities is crucial to address market inefficiencies and achieve overall welfare maximization.
Topic Definition
Externalities occur when the marginal social benefit or cost of a good differs from the private benefit or cost. The socially optimal output level accounts for externalities, aiming to align production with maximum social welfare by considering all costs and benefits. Understanding externalities is crucial to address market inefficiencies and achieve overall welfare maximization.
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