-In the above figure, S1 represents the supply curve which includes private costs, and S2 is the supply curve which includes social costs. If the firm is producing a product that has external costs that the firm does NOT have to pay, what will be the equilibrium price and quantity?

Question

Quizplus · Accepted Answer

When a firm's production includes external costs not borne by the firm (such as pollution), the social cost of production is higher than the private cost. This is represented by the supply curve S2, which is above S1. The equilibrium that includes these social costs would be at a higher price and lower quantity than the equilibrium based on private costs alone, which corresponds to option B (P2, Q3). This reflects the true cost of production including the externalities.

-In the Above Figure, S1 Represents the Supply Curve Which