Figure 10-12 Price Supply Extemal benefit Line 2 Line 1 21 02 Quantity Refer to

Question

Figure 10-12 Price Supply Extemal benefit Line 2 Line 1 21 02 Quantity Refer to Figure 10-12. Suppose, on the figure, Q represents the quantity of education and P represents the price of education. Then the quantity e2 -21 represents an inefficiency. the extent of the negative externality that pertains to the market for education. the amount of the tax that would be required to correct the negative externality that pertains to the market for education the amount of the subsidy that would be required to correct the positive externality that pertains to the et for education.

Explanation / Answer

Correct option is (1).

Since an external benefit exists, there is a positive externality which makes Marginal social benefit (Line 2 in graph) higher than marginal private benefit (Line 1). Unless this externality is internalized, the unregulated private market will produce less output that socially optimal output (Q1 < Q2), so (Q2 - Q1) is an inefficiency.

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