Define MPC and MSB in the context of externalities.

Unlock all questions

This demo includes only 20 questions. Upgrade to access hundreds of questions, flashcards, exam simulations, and disable ads.

Full question bankExam simulationsFlashcards
From $25.99Unlock all

Prepare for the AP Microeconomics exam on Market Failure and the Role of Government with detailed quizzes featuring multiple-choice questions, hints, and explanations. Master your understanding and ace the test!

Multiple Choice

Define MPC and MSB in the context of externalities.

Explanation:
In externalities, we separate private costs and benefits from the overall social ones. MPC is the cost borne by the producer for producing an extra unit—i.e., the marginal private cost. MSB is the marginal social benefit, which adds the private benefit to any external benefits to others. So MSB equals private benefit plus external benefits. This is why the correct description is that MPC is the producer’s cost, and MSB is the private benefit plus external benefits. The other statements mix up who bears the cost or what counts as the social benefit.

In externalities, we separate private costs and benefits from the overall social ones. MPC is the cost borne by the producer for producing an extra unit—i.e., the marginal private cost. MSB is the marginal social benefit, which adds the private benefit to any external benefits to others. So MSB equals private benefit plus external benefits. This is why the correct description is that MPC is the producer’s cost, and MSB is the private benefit plus external benefits. The other statements mix up who bears the cost or what counts as the social benefit.

More Multiple Choice Questions
Subscribe

Get the latest from Passetra

You can unsubscribe at any time. Read our privacy policy