The following figure shows the private cost and social cost of producing Good X.

-Refer to the figure above.Total welfare can be increased by ________.
A) increasing output above Q₁ units
B) reducing output below Q₁ units
C) lowering the market price below P₁
D) increasing the market price above P₂

Question

The following figure shows the private cost and social cost of producing Good X.
 
-Refer to the figure above.Total welfare can be increased by ________.
A) increasing output above Q₁ units 
B) reducing output below Q₁ units 
C) lowering the market price below P₁ 
D) increasing the market price above P₂

Quizplus · Accepted Answer

The efficient level of output is where social cost equals social benefit, which is Q₁ units in this case. At Q₁, total welfare is maximized. However, the private cost is lower than the social cost, so firms will produce more than the efficient level, which results in a deadweight loss. Thus, to increase total welfare, output should be reduced below Q₁ units. Therefore, the correct choice is B, reducing output below Q₁ units.

The Following Figure Shows the Private Cost and Social Cost