-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. If the competitive industry were producing the socially optimal quantity of this product, the market price of the product per unit would be

Question

Quizplus · Accepted Answer

The socially optimal quantity accounts for external costs not considered in the unregulated market price. Thus, the price reflecting the true social cost would be higher than P*, indicated as P′ in typical economic models.

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