Use the figure below to answer the following questions.

Figure 16.2.1
-Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If the market is unregulated, then
A)the quantity produced is efficient but price is too low.
B)the quantity produced is less than the efficient quantity.
C)the quantity produced is greater than the efficient quantity.
D)the quantity produced is efficient but the price is too high.
E)the externality is eliminated.

Question

Use the figure below to answer the following questions.
  
Figure 16.2.1
-Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If the market is unregulated, then
A)the quantity produced is efficient but price is too low. 
B)the quantity produced is less than the efficient quantity. 
C)the quantity produced is greater than the efficient quantity. 
D)the quantity produced is efficient but the price is too high. 
E)the externality is eliminated.

Quizplus · Accepted Answer

If the market is unregulated, the equilibrium quantity will be where the market demand curve intersects with the marginal private cost curve. This quantity is greater than the efficient quantity, which is where the marginal social cost curve intersects with the market demand curve. Therefore, the quantity produced is greater than the efficient quantity. The price will be determined by the intersection of the market demand and supply curves, which in this case is below the marginal social cost curve. Therefore, the price is too low from a social perspective. This creates a negative externality, which is not eliminated in an unregulated market.

Use the Figure Below to Answer the Following Questions