ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Marginal (private and social) COST (as the SUPPLY curve)
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Marginal (private and social) BENEFIT (as the DEMAND curve)
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Either A or B
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None of the above
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Detailed explanation-1: -When we add external benefits to private benefits, we create a marginal social benefit curve. In the presence of a positive externality (with a constant marginal external benefit), this curve lies above the demand curve at all quantities.
Detailed explanation-2: -Marginal Social Benefits and Marginal Social Costs Marginal benefit represents the total benefit gained from the production or consumption of an extra unit of a good or service, while marginal cost reflects the cost implication to society through the production of additional goods or services.
Detailed explanation-3: -When marginal benefit is measured by the demand curve, and marginal cost is measured by the supply curve, then: marginal benefit equals marginal cost at the point where demand equals supply.
Detailed explanation-4: -If the plant’s marginal social costs are higher than the plant’s marginal private costs, the marginal external cost is positive and results in a negative externality, meaning it produces a negative effect on the environment.