Figure 4-15
Figure 4-15 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 4-15.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₁ represent?

Question

Figure 4-15
  Figure 4-15 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 4-15.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₁ represent?

Quizplus · Accepted Answer

S₁ represents the market supply curve reflecting marginal private cost, as it does not account for the external costs that lead to the economically efficient output being Q₂ instead of the current equilibrium output Q₁.

Figure 4-15 Figure 4-15 Shows a Market with an Externality