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 MC2 and MB0, respectively, then the competitive equilibrium quantity is
A) too low for allocative efficiency.
B) too high for allocative efficiency.
C) consistent with allocative efficiency.
D) not enough information to determine allocative efficiency.

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 MC2 and MB0, respectively, then the competitive equilibrium quantity is
A) too low for allocative efficiency. 
B) too high for allocative efficiency. 
C) consistent with allocative efficiency. 
D) not enough information to determine allocative efficiency.

Quizplus · Accepted Answer

At point A, the market equilibrium quantity is Q1, which corresponds with the private marginal benefits (represented by MB1) and private marginal costs (represented by MC1). However, the social marginal benefits (represented by MB0) exceed the private marginal benefits, and the social marginal costs (represented by MC2) exceed the private marginal costs. This indicates that there is a positive externality in production at the market equilibrium quantity. Therefore, the market equilibrium quantity is too low for allocative efficiency, since the socially optimal quantity would be higher (at Q2, where MC2=MB0).

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