Figure 4-15

Figure 4-15 shows a market with an externality.The current market equilibrium output of Q₁ is not the economically efficient output.The economically efficient output is Q₂.
-Refer to Figure 4-15.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₁ represent?

Question

Figure 4-15
  
Figure 4-15 shows a market with an externality.The current market equilibrium output of Q₁ is not the economically efficient output.The economically efficient output is Q₂.
-Refer to Figure 4-15.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₁ represent?

Quizplus · Accepted Answer

S₁ represents the market supply curve reflecting private cost, as it is the supply curve before accounting for the externality that leads to the economically efficient output at Q₂.

Figure 4-15 Figure 4-15 Shows a Market with an Externality.The Current Market