Figure 5-2

Figure 5-2 shows a market with a negative externality.
-Refer to Figure 5-2.The true marginal cost of the last unit produced is represented by the price

Question

Figure 5-2
  
Figure 5-2 shows a market with a negative externality.
-Refer to Figure 5-2.The true marginal cost of the last unit produced is represented by the price

Quizplus · Accepted Answer

The marginal cost of production of the last unit (including the negative externality) is represented by Pf. Choosing the quantity Qf would result in the socially optimal outcome where marginal cost equals marginal benefit, thereby minimizing the total cost to society. The other choices (Pa, Pb, and Pc) represent quantities where marginal cost is less than marginal benefit, resulting in an overproduction of the good and a social surplus that is smaller than it could be with a reduction in production.

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