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A factory's total cost to society includes the private cost it pays for plus the pollution it imposes on a nearby river. The river-pollution component that the firm is not required to pay for is part of:
APrivate cost of the firm
BExplicit cost of the firm
CSunk cost of the firm
DSocial cost (external cost)
Answer & Solution
Correct answer: D. Social cost (external cost)
1. Social cost = private cost + external cost borne by society.
2. River pollution is a dis-utility the firm imposes without paying, so it is an external cost.
3. External cost forms part of social cost, not of the firm's private cost.
4. It is not private (A) or explicit (B) since the firm pays nothing for it, and it is not a past sunk outlay (C). Hence social cost.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.2_
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