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.If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does S₂ represent?
A)the market supply curve reflecting marginal private cost
B)the market supply curve reflecting marginal social cost
C)the market supply curve reflecting external cost
D)the market supply curve reflecting implicit cost

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.If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does S₂ represent?
A)the market supply curve reflecting marginal private cost 
B)the market supply curve reflecting marginal social cost 
C)the market supply curve reflecting external cost 
D)the market supply curve reflecting implicit cost

Quizplus · Accepted Answer

S₂ represents the market supply curve reflecting marginal social cost, which takes into account the external cost. This curve intersects with the demand curve at the economically efficient output level of Q₂.

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