Refer to the accompanying table,where Q represents the quantity produced,internal cost and external cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities. The social optimum occurs where price is __________ and quantity is __________.

Question

Refer to the accompanying table,where Q represents the quantity produced,internal cost and external cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities.  The social optimum occurs where price is __________ and quantity is __________.

Quizplus · Accepted Answer

The social optimum occurs where marginal social benefit (MSB) equals marginal social cost (MSC). From the table, we can calculate the MSB and MSC at different quantities.

At a quantity of 1, MSB = $12 and MSC = $15 (internal cost)
At a quantity of 2, MSB = $10 and MSC = $11 (internal cost + external cost of $1)
At a quantity of 3, MSB = $8 and MSC = $9 (internal cost + external cost of $2)
At a quantity of 4, MSB = $6 and MSC = $7 (internal cost + external cost of $3)
At a quantity of 5, MSB = $4 and MSC = $5 (internal cost + external cost of $4)
At a quantity of 6, MSB = $2 and MSC = $3 (internal cost + external cost of $5)

The social optimum occurs where MSB = MSC = P. Therefore, at a quantity of 3, the P value is $10, which is the price consumers are willing to pay. This is the intersection point of the MSB and MSC curves, and it represents the socially optimal quantity.

Refer to the Accompanying Table,where Q Represents the Quantity Produced,internal