Figure 5-1

Figure 5-1 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 5-1.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
A)the effect of a positive externality in the production of a good.
B)the effect of a negative externality in the production of a good.
C)the effect of an external cost imposed on a producer.
D)the effect of an external benefit such as a subsidy granted to consumers of a good.

Question

Figure 5-1
  
Figure 5-1 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 5-1.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
A)the effect of a positive externality in the production of a good. 
B)the effect of a negative externality in the production of a good. 
C)the effect of an external cost imposed on a producer. 
D)the effect of an external benefit such as a subsidy granted to consumers of a good.

Quizplus · Accepted Answer

The diagram shows that the current market equilibrium output of Q₁ is not the economically efficient output, which indicates the presence of a negative externality in the production of the good. The socially optimal output is Q₂, which is lower than the market equilibrium output, suggesting that the production of the good creates external costs that are not accounted for in the market price.

Figure 5-1 Figure 5-1 Shows a Market with an Externality. the Current