FIGURE 12-1

-Refer to Figure 12-1, which represents a hypothetical market for steel. What is the marginal external cost equal to?
A) FG
B) FH
C) GH
D) OF

Question

FIGURE 12-1
 
-Refer to Figure 12-1, which represents a hypothetical market for steel. What is the marginal external cost equal to?
A) FG 
B) FH 
C) GH 
D) OF

Quizplus · Accepted Answer

Marginal external cost is equal to the difference between the marginal social cost (MSC) and the marginal private cost (MPC) of a good. In this diagram, FH represents the difference between the MPC and MSC. Therefore, the marginal external cost is equal to FH. To correct for this externality, the optimal level of output should be where the marginal private cost (MPC) intersects the marginal social cost (MSC), which is at point E. Therefore, the optimal choice is to produce Q1 units of steel.

FIGURE 12-1 -Refer to Figure 12-1, Which Represents a Hypothetical Market for a Hypothetical