In the production of electricity with fixed-production technology,the socially efficient price is $2 and the socially efficient level of output is 400 units;the market equilibrium price is $1.50 and the market equilibrium quantity is 600 units.The marginal external cost is:
A) $0.20
B) $0.50
C) $1.50
D) $2.00
E) $3.50

Question

Quizplus · Accepted Answer

The marginal external cost (MEC) is the amount by which the social cost of one additional unit exceeds the private cost borne by the producer. We know that the socially efficient level of output is 400 units, which means that for every unit produced beyond that point, there is an external cost to society.

To find the MEC, we need to compare the social cost of producing 401 units to the private cost borne by the producer. At that level of output, the social cost is $2 per unit (the socially efficient price), while the private cost is $1.50 (the market equilibrium price). Therefore, the MEC is $2 - $1.50 = $0.50.

So, the best choice is B, $0.50.

In the Production of Electricity with Fixed-Production Technology,the Socially Efficient