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.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₂ represent?

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.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₂ represent?

Quizplus · Accepted Answer

S₂ represents the market supply curve reflecting social cost, which takes into account both the private cost and the external cost associated with the production of the good. This reflects the economically efficient output level of Q₂, where the social cost of production is equal to the social benefit, maximizing society's overall welfare.

Figure 4-15 Figure 4-15 Shows a Market with an Externality.The Current Market