Figure 4-15
Figure 4-15 shows a market with an externality. The current market equilibrium output of Q₁ is not the economically efficient output. The economically efficient output is Q₂.
-Refer to Figure 4-15.Suppose the current market equilibrium output of Q₁ is not the economically efficient output because of an externality.The economically efficient output is Q₂.In that case,the diagram shows

Question

Figure 4-15
  Figure 4-15 shows a market with an externality. The current market equilibrium output of Q₁ is not the economically efficient output. The economically efficient output is Q₂.
-Refer to Figure 4-15.Suppose the current market equilibrium output of Q₁ is not the economically efficient output because of an externality.The economically efficient output is Q₂.In that case,the diagram shows

Quizplus · Accepted Answer

The fact that the current market equilibrium output of Q₁ is not the economically efficient output and the economically efficient output is Q₂ implies the presence of a negative externality in the production of the good. This is because in the presence of a negative externality, the market tends to produce too much of the good and the socially optimal level of output is lower. Therefore, the diagram shows the effect of a negative externality in the production of a good.

Figure 4-15 Figure 4-15 Shows a Market with an Externality