Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market.
-Refer to Table 10-1. Which of the following statements is correct?
A)If the external cost per unit of output were $0 instead of $2, then the socially efficient quantity of output would be 4 units.
B)A tax of $4 per unit would enable this market to move from the equilibrium quantity of output to the socially optimal level of output.
C)Taking the external cost into account, total surplus declines when the 3rd unit of output is produced and consumed.
D)The market for flu shots is a market to which the concepts in this table apply very well.

Question

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market. 
-Refer to Table 10-1. Which of the following statements is correct?
A)If the external cost per unit of output were $0 instead of $2, then the socially efficient quantity of output would be 4 units. 
B)A tax of $4 per unit would enable this market to move from the equilibrium quantity of output to the socially optimal level of output. 
C)Taking the external cost into account, total surplus declines when the 3rd unit of output is produced and consumed. 
D)The market for flu shots is a market to which the concepts in this table apply very well.

Quizplus · Accepted Answer

Total surplus is the sum of consumer surplus and producer surplus, but in the presence of an external cost, there is also a loss of welfare from the perspective of society as a whole. This loss is reflected in the negative externality cost, and it starts to outweigh the gains of producer and consumer surplus after the second unit of output. Therefore, the socially optimal quantity of output is less than the market equilibrium quantity.

Table 10-1 the Following Table Shows the Private Value, Private Cost, and Cost