Figure 4-19
Figure 4-19 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 4-19.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does D₂ represent?
A) the demand curve reflecting external benefits
B) the demand curve reflecting social benefits
C) the demand curve reflecting private benefits
D) the demand curve reflecting the sum of social and external benefits

Question

Figure 4-19
  Figure 4-19 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 4-19.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does D₂ represent?
A) the demand curve reflecting external benefits 
B) the demand curve reflecting social benefits 
C) the demand curve reflecting private benefits 
D) the demand curve reflecting the sum of social and external benefits

Quizplus · Accepted Answer

D₂ represents the demand curve reflecting social benefits, which includes both the private benefits and external benefits. This is because the economically efficient output takes into account the full social benefits of the product, which includes not just the private benefits to the individual consumers, but also any external benefits to society as a whole.

Figure 4-19 Figure 4-19 Shows a Market with an Externality