The diagram below shows demand and supply curves for some perfectly competitive market. FIGURE 16-2 -Refer to Figure 16-2.Suppose that the marginal benefit curve (MB)includes all social benefits and that there is a negative externality in production.In this case,________ for allocative efficiency. A)P₁ and Q₁are appropriate B)the price P₁ is appropriate but the quantity Q₁is too low C)the price P₁ is appropriate but the quantity Q₁is too high D)the price P₁ is too low and the quantity Q₁is too high E)the price P₁ is too high and the quantity Q₁is too low

Question

Quizplus · Accepted Answer

When there is a negative externality in production, the marginal social cost (MSC) curve will shift upward, intersecting the demand curve at a lower quantity and a higher price. The new equilibrium price will be P₁, which is higher than the initial equilibrium price, and the new equilibrium quantity will be Q₁, which is lower than the initial equilibrium quantity. Thus, the quantity is too high and the price is too low for allocative efficiency. The appropriate price should reflect the social cost, and the appropriate quantity should reflect the social benefit.

The Diagram Below Shows Demand and Supply Curves for Some