Question

4. Greater consumption of alcohol leads to more motor vehicle accidents, and thus, imposes costs on people who do not drink and drive.

a. Illustrate the market for alcohol, labeling the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, and the efficient level of output.

b. On your graph, shade the area corresponding to the deadweight loss of the market equilibrium. (Hint: the deadweight loss occurs because some units of alcohol are consumed for which the social cost exceeds the social value.) EXPLAIN.

Answer 1

ANS a. The market for alcohol is shown in Figure below. The social cost curve is above the supply curve because of the negative externality from increased motor vehicle accidents caused by those who drink and drive. The free-market equilibrium level of output is Qmarket and the efficient level of output is Qoptimum.

b. The triangular area between points A, B, and C represents the deadweight loss of the market equilibrium. This area shows the amount by which social costs exceed social value for the quantity of alcohol consumption beyond the efficient level.

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