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 socially optimal price for this good should be ________.

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 socially optimal price for this good should be ________.

Quizplus · Accepted Answer

The socially optimal price occurs when the marginal social cost (MSC) is equal to the marginal social benefit (MSB). In this case, because there is a negative externality, the MSC includes the external cost of $2 per unit, so the socially optimal quantity is where MSC = MSB at a price of $7. At this price, consumers will demand 8 units and producers will supply 8 units, resulting in a total production of 8 units which is the socially optimal quantity. Therefore, the correct answer is (D) $7.

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