Question

An external cost: Select one: a. leads to economic efficiency only when private costs are greater than external costs. b. causes markets to allocate resources efficiently. c. affects producers but not consumers. d. is a cost paid by people other than the producer or consumer trading in the market.

Answer 1

Answer: D

Explanation: An external cost is the cost incurred by an economic agent other than the economic agent involved in the production or consumption of a good or service.

When production or consumption activities of an economic agent creates external costs, the social cost would be higher than the private cost.

An example of external cost is the pollution caused by a cigarette smoker on the people not smoking around him.

External cost increases inefficency.