Question

True or False. Suppose a certain good provides an external benefit. if the private cost of the last unit of the good that was produced is equal to the social value of that unit, then the sum of producer and consumer surplus is maximized.

Answer 1

When looking for the market equilibrium (sometimes called the unregulated market equilibrium), we want to select the quantity where demand = supply or where marginal private benefit = marginal private cost. Diagrammatically, this will happen where MPB intersects MPC. The quantity where this occurs will always maximize market surplus.

When looking for the social surplus maximizing equilibrium, we want to select the quantity where marginal social benefit = marginal social cost. Diagrammatically, this will happen where MSB intersects MSC. The quantity where this occurs will always maximize social surplus.

Hence, the above statement is False.