-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 market price reflected the full social cost per unit of producing and consuming this product (i.e., both private and external costs) , the quantity produced by this competitive industry would be

Question

Quizplus · Accepted Answer

The full social cost includes both private and external costs. When these are accounted for, the quantity produced typically decreases from the unregulated level (Q*) to a lower quantity (Q′) that reflects the true cost to society.

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