-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 expected cost to producers of this product due to unreasonable jury awards in frivolous lawsuits were greater than the external cost per unit produced, the quantity of the good produced by this competitive industry would be

Question

Quizplus · Accepted Answer

If the expected cost to producers due to frivolous lawsuits is greater than the external cost, it would increase the producers' total costs, leading to a decrease in production below the unregulated competitive level (Q*), which is already above the socially optimal quantity due to the external cost not being accounted for in the market price. This would make the quantity produced less than the socially optimal quantity.

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