Question

1.An external diseconomy will result in a socially nonoptimal use of a resource because:             

Private costs will exceed social costs.

It prohibits economic growth

The resource user will not bear the full costs of his actions

Firms will not maximize their profits

Too little of the resource will be used

When resources prices reflect true social costs:             

2.External diseconomies must be present

Profit maximizing firms will tend to produce socially desirable amount of output

Firms will not use any air or water in their production processes

Production will cease

Firms realize no net benefits from continued production.

Answer 1

Answer 1: The resource user will not bear the full costs of his actions

External diseconomies mean that there is a costs associated with the production process that have not been taken into account by the seller. In this case, the social cost exceeds private cost and producer uses too many of the resources.

Answer 2: Profit maximizing firms will tend to produce a socially desirable amount of output

When the firms produce socially desirable amount it means that they have taken into account the external cost into the production process as well. In this case, the resource prices will reflect true social cost.