Figure 13-1 shows a market with an externality. The current market equilibrium output of Q 1 is not the economically efficient output. The economically efficient output is Q 2 . -Refer to Figure 13 -1. Suppose the current market equilibrium output of Q₁is not the economically efficient output because of an externality. The economically efficient output is Q₂. In that case, diagram shows A) the effect of an external cost imposed on a producer. B) the effect of a positive externality in the production of a good. C) the effect of an external benefit such as a subsidy granted to consumers of a good. D) the effect of a negative externality in the production of a good.

Question

Quizplus · Accepted Answer

The description indicates a situation where the current market equilibrium output is not efficient due to an externality, and the efficient output is different. This scenario typically represents the effect of a negative externality in the production of a good, where the social cost exceeds the private cost, leading to overproduction relative to the socially optimal level.

Figure 13-1 Shows a Market with an Externality