Question

If the use of a good imposes an external cost on bystanders, the efficient equilibrium will have:

a) A higher quantity and a lower price than the market equilibrium.
b) A lower quantity and a higher price than the market equilibrium.
c) The same quantity and price as the market equilibrium.
d) No equilibrium is possible.

Answer 1

In a market with external costs, the efficient equilibrium will have a lower quantity and a higher price than the market equilibrium.

Step-by-step explanation:

In a market with external costs, the efficient equilibrium will have a lower quantity and a higher price than the market equilibrium. This is because the external cost imposed by the use of the good causes the social cost to be higher than the private cost (the cost borne by the producer). As a result, the supply curve shifts up, leading to a higher price and a lower quantity compared to the market equilibrium.