Question

1.     What does a full-cost price include?

a.     Internal costs plus external costs

b.     Internal costs minus external costs

c.     External costs minus internal costs

None of the above

Answer 1

Internal Costs - They are directly rendered by the seller for producing a given number of goods. These include various variable costs and fixed costs

External Costs - External Costs are those which are imposed on a party which is not involved in the initial buying-selling transaction. Example - Air pollution due to the usage of fossil fuels. This affects the third person as well in a negative way

Answer a. Internal costs plus external costs

In the full-cost price model, both the internal and external costs are included. This is done because someone or the other must bear the negative effect the transaction endured by the third party or environment. Thus this action closes the gap between the false and real prices by reflecting both the internal and external costs in the total price.