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
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 MC0 and MB1, 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

Since the social marginal benefit MB1 is greater than the marginal private benefit (MPB) represented by the demand curve at point A, there is an underallocation of resources. Therefore, the competitive equilibrium quantity is too low for allocative efficiency.

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