When farmers raise hogs, there are a number of external costs. In particular, ho
ID: 1225119 • Letter: W
Question
When farmers raise hogs, there are a number of external costs. In particular, hogs generate methane gas. Without government regulation, the equilibrium price and quantity of ova raised means that: A. The price will be less than the marginal costs to hog farmers B. The price will be less than the marginal benefit C. The price will be less than the marginal social cost D. Too few hogs will be raised When farmers raise hogs, there are a number of external costs. In particular, hogs generate methane gas. Without government regulation, the equilibrium price and quantity of ova raised means that: A. The price will be less than the marginal costs to hog farmers B. The price will be less than the marginal benefit C. The price will be less than the marginal social cost D. Too few hogs will be raised A. The price will be less than the marginal costs to hog farmers B. The price will be less than the marginal benefit C. The price will be less than the marginal social cost D. Too few hogs will be raisedExplanation / Answer
Hog farming or rearing, in general, resembles perfectly competitive market.
In a perfectly competitive market, price equals marginal cost.
Thus, equilibrium price of hog is equal to the marginal cost of hog farmers.
However, it has been stated that hogs generate methane gas and thus pollute environment.
This implies that there is generation of negative externality due to hog farming.
In absence of government regulation, hog farmers are not internalizing the negative externality. When negative externality is not internalized or taken into cost of production private (farmers') marginal cost is less than marginal social cost.
Since, price is equal to marginal cost of hog farmers and marginal cost of farmers is less than the marginal social cost, it can be said that price is less than the marginal social cost.
Hence, the correct answer is option (C).
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