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

Question

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If social marginal costs and benefits are represented by MC2 and MB0 respectively, then the socially optimal quantity is where MC2 intersects MB0 at point C. At the competitive equilibrium quantity (point A), the marginal benefit to society (MB1) is greater than the marginal cost to society (MC1). This means that there are potential gains in allocative efficiency that could be achieved by increasing the quantity produced to the socially optimal level at point C. Therefore, the competitive equilibrium quantity is too low for allocative efficiency.

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