Exhibit 31-4

-Refer to Exhibit 31-4. If a negative externality exists,then the socially optimal output is

Question

Exhibit 31-4
 
-Refer to Exhibit 31-4. If a negative externality exists,then the socially optimal output is

Quizplus · Accepted Answer

The socially optimal output is where the marginal social benefit (MSB) is equal to the marginal social cost (MSC). In this diagram, the MSB curve is given by the demand curve and the MSC curve is given by the supply curve plus the external cost. The intersection of these curves at point U1 gives the socially optimal output of QS1. The market equilibrium output is Qe, which is greater than QS1. Therefore, to reach the socially optimal output, production should be reduced. This reduction should be equal to the external cost per unit (distance between B12 and S1). Therefore, the socially optimal output is Q₂.

Exhibit 31-4 -Refer to Exhibit 31-4. If a Negative Externality Exists,then the Negative