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 MC1 and MB0, respectively, then there exists
A) a negative external benefit.
B) a negative external cost.
C) a positive external benefit.
D) a positive external cost.
E) no externalities at all.

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 MC1 and MB0, respectively, then there exists
A) a negative external benefit. 
B) a negative external cost. 
C) a positive external benefit. 
D) a positive external cost. 
E) no externalities at all.

Quizplus · Accepted Answer

At equilibrium point A, the market fails to take into account the negative externality which results in social marginal cost being greater than private marginal cost (MC1>MC0) which indicates the existence of a negative external cost.

FIGURE 16-1 -Refer to Figure 16-1. Suppose That the Perfectly Competitive Market