Question

The following graph represents a market with an externality. Assume there is no government intervention. (6 pts.) 8. Price MSC $210 МPC $200 $197 D MSB Quantity 500 600 700 Is this an example of a negative or positive externality? a. b. What quantity will be produced in the market? What price will the market sell each unit? C. Calculate the external cost per unit at the quantity that that is being produced in the market d. What is the efficient quantity to produce? e. Using the graph above, identify the area that represents the inefficiency in the market f.

Answer 1

8.a) In this market, marginal social cost is greater than marginal private cost. It means this is an example of negative Externality.

b) The market equilibrium occurs at the point where demand curve intersects the MPC curve. At this point, market equilibrium quantity is 600 units.

C) The market price will be $197/unit.

d) At Q= 600, MSC = $210/unit and MPC = $197/unit.

MSC = MPC + external cost

Or, External cost = $(210 - 197) = $13 per unit.

e) Socially efficient equilibrium is produced at the point where demand curve intersects the MSC curve. Therefore, efficient quantity is 500 units.