Exhibit 30-1

Refer to Exhibit 30-1. This graph represents a negative externality situation. Given this, which of the two curves, X or Y, represents marginal social costs and why?
A)Curve X, because if there is a negative externality, external costs are associated with it: social costs = external costs + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve.
B)Curve Y, because if there is a negative externality, negative external costs are associated with it: social costs = negative external costs + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve.
C)Curve X, because if there is a negative externality, external benefits are associated with it: social costs = external benefits + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve.
D)Curve Y, because if there is a negative externality, negative external benefits are associated with it: social costs = negative external benefits + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve.

Question

Exhibit 30-1 ​

Refer to Exhibit 30-1. This graph represents a negative externality situation. Given this, which of the two curves, X or Y, represents marginal social costs and why?
A)Curve X, because if there is a negative externality, external costs are associated with it: social costs = external costs + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve. 
B)Curve Y, because if there is a negative externality, negative external costs are associated with it: social costs = negative external costs + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve. 
C)Curve X, because if there is a negative externality, external benefits are associated with it: social costs = external benefits + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve. 
D)Curve Y, because if there is a negative externality, negative external benefits are associated with it: social costs = negative external benefits + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve.

Quizplus · Accepted Answer

In a negative externality situation, there are external costs associated with the activity. The social costs of the activity are equal to the private costs plus the external costs. Therefore, the marginal social cost curve must lie above the marginal private cost curve. Curve X represents the marginal social costs, as it lies above the marginal private cost curve.

Exhibit 30-1 ​ Refer to Exhibit 30-1. This Graph Represents a Negative Externality

Exhibit 30-1 Refer to Exhibit 30-1. This Graph Represents a Negative Externality