Figure 5-2

Figure 5-2 shows a market with a negative externality.
-Refer to Figure 5-2.The efficient output level is

Question

Figure 5-2
  
Figure 5-2 shows a market with a negative externality.
-Refer to Figure 5-2.The efficient output level is

Quizplus · Accepted Answer

The efficient output level is where the marginal social benefit (MSB) equals the marginal social cost (MSC), which is at point Qₐ in the graph. At this output level, the total social surplus is maximized. Qd represents the private optimal output level where the marginal private benefit (MPB) equals the marginal private cost (MPC), but this does not take into account the negative externality and leads to overproduction. Therefore, it is not the efficient output level. Qb represents the market equilibrium output level where the intersection of the demand curve and the marginal social cost curve (MSC) occurs, but it leads to external costs and a deadweight loss. The difference between Qb and Qd (Qb - Qd) is the size of the overproduction externality, but it is not the efficient output level.

Figure 5-2 Figure 5-2 Shows a Market with a Negative Externality