Figure 5-5

Figure 5-5 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 5-5.If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does D₁ represent?

Question

Figure 5-5
  
Figure 5-5 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 5-5.If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does D₁ represent?

Quizplus · Accepted Answer

D₁ represents the demand curve reflecting private benefits, as it is the current equilibrium demand curve before accounting for externalities.

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