The U.S. economy is experiencing rising output, rising ...

[Metfan725]

The U.S. economy is experiencing rising output, rising employment, rising incomes and falling unemployment. These conditions best describe a business cycle
 
  A) expansion.
  B) peak.
  C) trend.
  D) recession.
  E) trough.

Question 2

If the production of a good causes pollution (an external cost), is the unregulated competitive market equilibrium of that product efficient?
 
  What will be an ideal response?

[Carliemb17]

Answer to Question 1

A

Answer to Question 2

The presence of pollution means that the supply curve of the firm, which is also the firm's marginal cost curve, only represents the firm's private costs and ignores all external costs. The equilibrium between supply and demand curves leads to overproduction of this good. The amount produced, therefore, is not efficient because the level of production occurs where the marginal private cost equals the marginal (social) benefit rather than where the marginal social cost equals the marginal (social) benefit.