Given the negative externality reflected in the above graph, what can we say abo
ID: 1217829 • Letter: G
Question
Given the negative externality reflected in the above graph, what can we say about the price - output combination that we would get in a free (no govt intervention) market? A. The free market would result in P1, Q1 which is not optimal from societies' perspective. B. The free market would result in P1, Q1 which is optimal from societies' perspective. C. The free market would result in P2, Q2 which is not optimal from societies' perspective. D. The free market would result in P2, Q2 which is optimal from societies' perspective.Explanation / Answer
The government provide efficient quantity of output when marginal benefit=marginal cost.The demand curve is equal to the marginal benefit curve, while the supply curve is equal to the marginal cost curve. The optimal quantity of the public good occurs where MB (society's marginal benefit) equals MC (provider's marginal cost) intersects . When MB = MC, resources have been allocated efficiently.So if it is a free market then we can say that P2,Q2 are optimal from society as the demand curve and the marginal social cost curve intersects each other .So the related price is P2 and the related quantity is Q2.But here the condition is no government intervention-so the market is private afterall.In the case of negative externality we can say the optimal quantity will be found at the intersection of both marginal private cost curve and the demand curve.So P1,Q1is the optimal from society's perspective.
We can say B.the free market would result in P1,Q1 which is optimal from societies perspective.
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