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Which of the following are true? a
Which of the following are true?
a. Negative externalities are real costs, but, unlike the other resources a firm uses in production, no one owns the air, so a firm does not have to pay for its use.
b. In the case of external costs, firms tend to produce too much from society's standpoint, causing an efficiency loss due to an overallocation of scarce resources to the production of the good.
c. If government could impose a pollution tax equal to the exact size of the external costs imposed by a firm, then the firm would produce at the socially desired level of output.
d. All of the above are true.
Expert Solution
All the statements above are true:
It is true that a firm does not have to pay to use air. However, regulations on using it have to be put in place to protect society at large.
Production in an organization has to be in line with the society's point of view. This means that the production level in a company is limited. This limitation brings about losses.
The imposition of a pollution tax equal to external costs brings a balance between the firm and the society. Therefore, the firm will produce as per society desires.
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