Use the figure below to answer the following question(s).
Figure 5-2

-Figure 5-2 illustrates the market for a product that generates an external cost.S₁ is the private market supply curve,while S₂ is the supply curve including the external cost.Which of the following is true?

Question

Use the figure below to answer the following question(s).
Figure 5-2
 
-Figure 5-2 illustrates the market for a product that generates an external cost.S₁ is the private market supply curve,while S₂ is the supply curve including the external cost.Which of the following is true?

Quizplus · Accepted Answer

The socially efficient output is where the marginal social benefit (MSB) equals the marginal social cost (MSC), which is at point E. However, the market equilibrium is at point C, where the private marginal cost (PMC) equals the marginal private benefit (PMB). This means that the market is producing too much output (Qc), which is greater than the socially efficient level of output (Qe). Moreover, the market price (Pc) is too low because it only reflects the private costs and benefits and doesn't take into account the external cost. Therefore, choice A is correct because the output is too large and the price is too low relative to economic efficiency.

Use the Figure Below to Answer the Following Question(s)