According to the theory of market failure, in case of external economies, which of the following…
Statements i and iii are true: external economies lead to underproduction relative to the social optimum, and marginal social cost is below private marginal cost. Private…
Choose your answer
According to the theory of market failure, in case of external economies, which of the following statements are true?
i. Actual output is less than socially optimal output
ii. Actual output is more than socially optimal output
iii. The marginal social cost is less than the private marginal cost
iv. The marginal social cost is more than the private marginal cost
Answer and explanation
Correct answer A
Statements i and iii are true: external economies lead to underproduction relative to the social optimum, and marginal social cost is below private marginal cost. Private producers do not take the full external benefit into account when making their output decisions.
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Telangana SET (TG SET)