Question

9. In order for the equilibrium quantity in a market to be an efficient quantity for society, which of the following need to be true?

I) Very few firms are producing the good so they can have a strong influence on the market price

II) There are no external marginal benefits or external marginal costs associated with the good

III) The good is not a public good

a) Only III needs to be true

b) Only I needs to be true

c) Only I and II need to be true

d) Only I and III need to be true

e) Only II and III need to be true

Answer 1

Correct option is (e).

Market equilibrium quantity is derived by equating private marginal benefit (PMB) with private marginal cost (PMC), by ignoring marginal external benefit (MEB) or marginal external cost (MEC). Efficient outcome is derived by equating marginal social benefit (MSB = PMB + MEB) with marginal social cost (MSC = PMC + MEC). Therefore, if MEB = 0 and MEC = 0, MSB = PMB and MSC = PMC, and market output equals efficient output. This is possible if the good is a non-public good.