Question 3:

When we say that production externalities are present with respect to a particular product we mean

1. that the economy must necessarily operate inefficiently with respect to the production of the product in question.

2. that the quantity produced of the product in question, despite what the government does, cannot be the socially optimal quantity.

3. that private costs and benefits are not everywhere equal to social costs and benefits.

4. that all of the above are true.

Choose the option that yields the correct answer.