Use the table below to answer the following questions.
Table 16.3.1

-Refer to Table 16.3.1. The table shows marginal private benefit and the marginal social benefit from the consumption of chemical fertilizer and the marginal social cost of the production of fertilizer. If production is left to the private market, the quantity produced is
A)1 unit.
B)2 units.
C)3 units.
D)4 units.
E)5 units.

Question

Use the table below to answer the following questions.
Table 16.3.1
 
-Refer to Table 16.3.1. The table shows marginal private benefit and the marginal social benefit from the consumption of chemical fertilizer and the marginal social cost of the production of fertilizer. If production is left to the private market, the quantity produced is
A)1 unit. 
B)2 units. 
C)3 units. 
D)4 units. 
E)5 units.

Quizplus · Accepted Answer

The private market only considers the marginal private benefit while overlooking the external costs imposed on society. The market equilibrium is where marginal private benefit equals marginal private cost, which is at Q = 2 units. However, this level of production results in an overallocation of resources because the marginal social cost of producing the third unit of fertilizer is greater than the marginal social benefit from consuming it. Therefore, the socially optimal level of production is where marginal social benefit equals marginal social cost, which is at Q = 3 units. As a result, the market will produce only 3 units of chemical fertilizers if it is left to the private market.

Use the Table Below to Answer the Following Questions