Homework Answers
The correct answer is Option (D) The equilibrium quantity is larger than the socially optimal quantity
Explanation -
The first point to note is that since there is a social cost involved, there is negative externality.
The equilibrium quantity without government intervention is 250 units (intersection of private supply and demand curve). However, the socially optimal quantity is just 200 units (intersection of social cost and demand curve). Therefore, the equilibrium quantity is larger than the socially optimal quantity.
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