The following figure shows the market supply and demand of a good whose production entails a $2 negative externality per unit.

-Refer to the figure above.The total cost of this externality to the society is equal to ________.

Question

The following figure shows the market supply and demand of a good whose production entails a $2 negative externality per unit.
 
-Refer to the figure above.The total cost of this externality to the society is equal to ________.

Quizplus · Accepted Answer

The cost of the externality is equal to the difference between the social marginal cost and the private marginal cost. In this case, the supply curve (private marginal cost) is shifted upward by $2 to get the social marginal cost curve. At the equilibrium quantity of 8, the social marginal cost is $10, while the market price is $6. Therefore, the cost of the externality per unit is $4 ($10 social marginal cost - $6 market price). The total cost of the externality is then $4 times the quantity of 8, which is $32. However, since this is a negative externality, the cost to society is the opposite sign of the benefits to the producers, which is $20 ($32 negative external cost - $12 private benefit to producers). Therefore, the correct answer is C.

The Following Figure Shows the Market Supply and Demand of a Good