-The expected damage to innocent third parties per unit of the good produced is shown as the "external cost" in Figure 27.1. An unregulated competitive market for the product produces a quantity of Q* units, which sell for a price of P* per unit. The competitive industry would produce the socially optimal quantity of this product if the expected per unit cost to producers of this product due to just and reasonable lawsuits were

Question

Quizplus · Accepted Answer

The socially optimal quantity of the product is produced when the expected per unit cost to producers due to just and reasonable lawsuits equals the external cost. This aligns the private cost of production with the social cost, including the damage to innocent third parties.

-The Expected Damage to Innocent Third Parties Per Unit of the Good