Figure 5-5 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 5-5.If,because of an externality,the economically efficient output is Q2 and not the current equilibrium output of Q1,what does D2 represent?
A)the demand curve reflecting external benefits
B)the demand curve reflecting social benefits
C)the demand curve reflecting private benefits
D)the demand curve reflecting the sum of social and external benefits

Question

Figure 5-5 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 5-5.If,because of an externality,the economically efficient output is Q2 and not the current equilibrium output of Q1,what does D2 represent?
A)the demand curve reflecting external benefits 
B)the demand curve reflecting social benefits 
C)the demand curve reflecting private benefits 
D)the demand curve reflecting the sum of social and external benefits

Quizplus · Accepted Answer

D2 represents the demand curve reflecting social benefits, which takes into account both private benefits and external benefits. This reflects the total value of the good to society, rather than just to individual consumers.

Figure 5-5 Shows a Market with an Externality