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In the case of an external diseconomy, where marginal social cost is above marginal private cost,...

In the case of an external diseconomy, where marginal social cost is above marginal private cost, how do the market equilibrium price and quantity differ from the socially optimal price and quantity?

Group of answer choices

Market equilibrium price is higher and market equilibrium quantity is lower than the socially optimal equilibrium price and quantity

Market equilibrium price is lower and market equilibrium quantity is higher than the socially optimal equilibrium price and quantity

Equilibrium price and quantity is the same in both situations

Market equilibrium price is lower than the socially optimal equilibrium price but equilibrium quantity is the same for both situations.

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Answer #2

Marginal Social cost (MSC) is above the marginal private cost (MPC)

Market equilibrium occurs at the intersection point of MSB and MPC.

Therefore, the market equilibrium price is P and market equilibrium quantity is Q.

Socially optimal equilibrium occurs at the intersection point of MSB and MSC.

Therefore, the socially optimal equilibrium price is P1 and quantity is Q1.

Market equilibrium price is lower and market equilibrium quantity is higher than the socially optimal equilibrium price and quantity.

Answer: Option (B)

answered by: anonymous
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