Question

Is the statement is true or false that in a market where the external cost of production are represented in the supply curve then market price would tend to be lower and the quality traded higher.Explain with example

Answer 1

False. The reason is external cost increases cost of production and supply curve shifts leftwards. Given the demand curve price will rise and quantity traded will fall. Suppose external cost increases of 10 per unit is applied to supply curve. As a result supply curve will shift leftwards by 10%.Given the completely inelastic demand curve(for simplicity) price will rise by 10%.but if the demand is less than perfect elastic which usually is the case - not only price will rise but quantity demanded will fall