Refer to the below diagram of the market for product X.Curve S_t embodies all costs (including spillovers) and D_t embodies all benefits (including spillovers) associated with the production and consumption of X.Assuming the equilibrium output is Q₂, we can conclude that the existence of spillover: A)costs have resulted in an over-allocation of resources to X. B)benefits have resulted in an over-allocation of resources to X. C)costs have resulted in an under-allocation of resources to X. D)benefits have resulted in an under-allocation of resources to X.

Question

Quizplus · Accepted Answer

The existence of spillover costs means that the social costs of producing and consuming X are higher than the private costs, which are only accounted for by the producer and consumer. Therefore, the equilibrium quantity of Q₂ results in an over-allocation of resources to X since the social costs outweigh the social benefits.

Refer to the Below Diagram of the Market for Product