Answered: Cars impose many external costs on…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Cars impose many external costs on society: carbon dioxide emissions that contribute to air pollution, congestion on roadways, and so on. Therefore, the market equilibrium quantity of cars is not equal to the socially optimal quantity. The following graph shows the demand for cars (their private value), the supply of cars (the private cost of producing them), and the social cost of cars (the private cost and external costs).

3. Efficiency in the presence of externalities
Cars impose many external costs on society: carbon dioxide emissions that contribute to air pollution, congestion on roadways, and so on. Therefore,
the market equilibrium quantity of cars is not equal to the socially optimal quantity. The following graph shows the demand for cars (their private
value), the supply of cars (the private cost of producing them), and the social cost of cars (the private cost and external costs).
Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially
optimal quantity.
Social Cost
Market Equilibrium
Supply
(Private Cost)
Socially Optimal Level
Demand
(Private Value)
QUANTITY OF CARS
PRICE OF CARS

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