Figure 5-1 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 5-1.Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality.The economically efficient output is Q2.In that case,the diagram shows
A)the effect of a positive externality in the production of a good.
B)the effect of a negative externality in the production of a good.
C)the effect of an external cost imposed on a producer.
D)the effect of an external benefit such as a subsidy granted to consumers of a good.

Question

Figure 5-1 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 5-1.Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality.The economically efficient output is Q2.In that case,the diagram shows
A)the effect of a positive externality in the production of a good. 
B)the effect of a negative externality in the production of a good. 
C)the effect of an external cost imposed on a producer. 
D)the effect of an external benefit such as a subsidy granted to consumers of a good.

Quizplus · Accepted Answer

The diagram shows the effect of a negative externality in the production of a good, which causes the market to produce an output level of Q1 that is higher than the socially efficient level of Q2. This is because the negative externality imposes a cost on third parties outside the market, leading to a situation where the private cost to producers is lower than the social cost to society. Therefore, the market produces more than is optimal, leading to a deadweight loss of welfare.

Figure 5-1 Shows a Market with an Externality