The following graph shows equilibrium in a market in the presence of an externality. The amount by which the total social cost of producing the private equilibrium level of output exceeds the total social benefit is _____.
Figure 17.1

A)$3,000
B)$1,000
C)$5,000
D)$1,600
E)$1,400

Question

The following graph shows equilibrium in a market in the presence of an externality. The amount by which the total social cost of producing the private equilibrium level of output exceeds the total social benefit is _____.​ ​
Figure 17.1
​

A)$3,000 
B)$1,000 
C)$5,000 
D)$1,600 
E)$1,400

Quizplus · Accepted Answer

The social cost of producing the private equilibrium level of output is represented by the marginal cost (MC) curve, which intersects the demand curve (MB) at the private equilibrium quantity. 
The total social benefit is represented by the demand curve (MB) and the total social cost is represented by the marginal cost curve (MC) shifted upwards by the amount of the externality. 
The vertical distance between the demand curve (MB) and the new total cost curve (MC + externality cost) at the private equilibrium quantity represents the amount by which the total social cost of producing the private equilibrium level of output exceeds the total social benefit.
In this case, the vertical distance is $1,600, which corresponds to choice (D).

The Following Graph Shows Equilibrium in a Market in the Presence