Figure 11-3 Figure 11-3 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 11-3.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₂ represent?

Question

Figure 11-3

Figure 11-3 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 11-3.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₂ represent?

Quizplus · Accepted Answer

S₂ represents the market supply curve reflecting social cost, which includes both private cost and external cost. This is the level of output that includes all costs to society, and is the economically efficient output.

Figure 11-3 Figure 11-3 Shows a Market with an Externality