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 D₂ 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 D₂ represent?

Quizplus · Accepted Answer

D₂ represents the demand curve reflecting social benefits, which includes both private benefits and external benefits. It is the demand curve that takes into account the full social value of the goods or services being exchanged in the market.

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