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SMC FIGURE 2.15 The difference between private and social marginal cost. PMC 0 98 9p

QUESTION 2.8: In Figure 2.15, if the firm is producing output, is there any external cost being generated? If so, why is this

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Answer #1

Yes, this is because there is a difference between SMC and PMC for all positive levels of output.

An output level is called socially optimal if it is calculated by substituting SMB = SMC

This is because all external costs are being incorporated and taken into account while calculating the socially optimally level of output.

Yes, it would be optimal to have no external cost, making SMC = PMC

This occurs at Q = 0

The point at which SMC = SMB is consistent with some external cost because all external costs and benefits are taken into account while calculating this level of output. The presence of external cost makes SMC > PMC

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