FIGURE 16- 1
-Refer to Figure 16- 1.Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A.If the social marginal costs and social marginal benefits are represented by MC0 and MB1,respectively,then the competitive equilibrium quantity is

Question

FIGURE 16- 1 
-Refer to Figure 16- 1.Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A.If the social marginal costs and social marginal benefits are represented by MC0 and MB1,respectively,then the competitive equilibrium quantity is

Quizplus · Accepted Answer

At point A, the competitive equilibrium quantity is Q1, which is less than the allocatively efficient quantity Q*. This indicates that the market is producing too little, which means the allocation of resources is not efficient. The social marginal benefit MB1 is higher than the private marginal benefit represented by demand curve D, while the social marginal cost MC0 is lower than the private marginal cost represented by supply curve S. This implies that the market is not taking into account the external benefits associated with producing the good, and as a result, the quantity produced is too low for allocative efficiency.