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.If,because of an externality,the economically efficient output is Q2 and not the current equilibrium output of Q1,what does S2 represent?
A)the market supply curve reflecting marginal private cost
B)the market supply curve reflecting marginal social cost
C)the market supply curve reflecting external cost
D)the market supply curve reflecting implicit cost

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.If,because of an externality,the economically efficient output is Q2 and not the current equilibrium output of Q1,what does S2 represent?
A)the market supply curve reflecting marginal private cost 
B)the market supply curve reflecting marginal social cost 
C)the market supply curve reflecting external cost 
D)the market supply curve reflecting implicit cost

Quizplus · Accepted Answer

S2 represents the market supply curve reflecting marginal social cost, which includes the private cost and the external cost. This is the supply curve that reflects the true cost to society of producing the good.

Figure 5-1 Shows a Market with an Externality