Refer to the diagram in which S is the market supply curve and S₁ is a supply curve comprising all costs of production,including external costs.Assume that the number of people affected by these external costs is large.Without government interference,this market will result in:

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Quizplus · Accepted Answer

Without government interference, the market will result in an over-allocation of resources to this product. This is because the market supply curve (S) only takes into account the private costs of production, and not the external costs. As a result, the market equilibrium (E) will be at a quantity of Q1 and a price of P1, which is lower than the socially optimal quantity of Q0 and a higher than socially optimal price of P0. This means that too much of the product is being produced and consumed, resulting in negative externalities for society as a whole.

Refer to the Diagram in Which S Is the Market