Exhibit 17-1 In Exhibit 17-1, the amount by which the total social cost of producing the private equilibrium level of output exceeds the total social benefit is
A)$300
B)$50
C)$5, 000
D)$1, 600
E)$8, 000

Question

Exhibit 17-1  In Exhibit 17-1, the amount by which the total social cost of producing the private equilibrium level of output exceeds the total social benefit is
A)$300 
B)$50 
C)$5, 000 
D)$1, 600 
E)$8, 000

Quizplus · Accepted Answer

The socially optimal output is where the marginal social benefit equals marginal social cost, which is at a quantity of 90. The private equilibrium is at a quantity of 70, where the marginal private benefit equals marginal private cost. Therefore, the amount by which social cost exceeds social benefit is the area between the vertical line at the private equilibrium quantity (70) and the vertical line at the socially optimal quantity (90), multiplied by the marginal social cost at a quantity of 70. This area can be calculated as a triangle with a base of (90-70)=20 and a height of $80, so the total social cost - total social benefit = (1/2)(20)($80) = $800. The private cost - private benefit difference is the area between the vertical line at the private equilibrium quantity (70) and the horizontal axis, multiplied by the marginal private cost at a quantity of 70. This area can be calculated as a rectangle with a width of 70 and a height of $50, so the total private cost - total private benefit = (70)($50) = $3,500. Therefore, the external cost imposed on society is $800 - $3,500 = -$2,700, but since external costs cannot be negative, we must use the absolute value to get $2,700.

Exhibit 17-1 in Exhibit 17-1, the Amount by Which