Figure 5-2 shows a market with a negative externality.
-Refer to Figure 5-2.The true marginal cost of the last unit produced is represented by the price
A)Pa.
B)Pb.
C)Pc.
D)Pf.

Question

Figure 5-2 shows a market with a negative externality.
-Refer to Figure 5-2.The true marginal cost of the last unit produced is represented by the price
A)Pa. 
B)Pb. 
C)Pc. 
D)Pf.

Quizplus · Accepted Answer

The true marginal cost of the last unit produced is represented by the intersection of the marginal cost curve and the demand curve, which is point F. Therefore, the price that represents the true marginal cost is Pf. The optimal choice would be to reduce the quantity produced to Qopt, which is where the marginal social cost (MSC) equals the marginal social benefit (MSB). At this point, the external cost is fully internalized and overall social welfare is maximized.

Figure 5-2 Shows a Market with a Negative Externality