FIGURE 16-1 -Refer to Figure 16-1.Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A.If the social marginal costs and social marginal benefits are represented by MC₁ and MB₀,respectively,then there exists A)a negative external benefit. B)a negative external cost. C)a positive external benefit. D)a positive external cost. E)no externalities at all.

Question

Quizplus · Accepted Answer

Point A is the equilibrium point in a perfectly competitive market with no government intervention, where the market demand and supply curves intersect. However, if the social marginal costs (SMC) and social marginal benefits (SMB) are different from the private marginal costs (PMC) and private marginal benefits (PMB), there exist externalities in the market. In this case, the SMC curve lies above the PMC curve, indicating a negative externality or an external cost. The MBS curve lies below the PMB curve, indicating that the private benefits are less than the social benefits, which means there is also a negative externality or an external cost. Therefore, the best choice is B - a negative external cost.

FIGURE 16-1 -Refer to Figure 16-1.Suppose That the Perfectly Competitive Market with Market