Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $25 and market output of 1,000 units. How does this outcome compare to the efficient, ideal equilibrium?
A) The efficient price would higher than $25 while the efficient output would be less than 1,000 units.
B) The efficient price would be higher than $25 while the efficient output would be greater than 1,000 units.
C) The efficient price would be lower than $25 while the efficient output would be less than 1,000 units.
D) The efficient price would be lower than $25 while the efficient output would be greater than 1,000 units.

Question

Quizplus · Accepted Answer

When there is an external cost, the market price and quantity will not reflect the full social cost. The efficient outcome would be achieved at a higher price (reflecting the full social cost) and a lower quantity, as the marginal cost to society exceeds the marginal benefit. Therefore, the efficient price would be higher than $25 while the efficient output would be less than 1,000 units. Choice A is the only option that reflects this understanding.

Suppose the Actions of the Producers of a Good Impose