Refer to the figure below. This graph suggests that the private market provides incentives to:
A)eliminate the externalities generated by paper production.
B)under-produce paper relative to the social optimum.
C)over-produce paper relative to the social optimum.
D)over-price paper relative to the social optimum.

Question

Refer to the figure below. This graph suggests that the private market provides incentives to: 
A)eliminate the externalities generated by paper production. 
B)under-produce paper relative to the social optimum. 
C)over-produce paper relative to the social optimum. 
D)over-price paper relative to the social optimum.

Quizplus · Accepted Answer

The private market is operating at point Q, where the marginal social cost (MSC) of producing paper is lower than the marginal social benefit (MSB) of paper consumption. This implies that the private market is producing more paper than what is optimal for society, which is at point P where MSC=MSB. Therefore, the private market provides incentives to over-produce paper relative to the social optimum.

Refer to the Figure Below