Efficiency in the presence of externalities Air horns impose many external costs on society: the risk of being deafened, the annoyance of being awakened in the middle of the night, and so on. Therefore, the market equilibrium quantity of air horns is not equal to the socially optimal quantity. The following graph shows the demand for air horns (their private value), the supply of air horns (the private cost of producing them), and the social cost of air horns, including both 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.

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 Efficiency in the presence of externalities

Air horns impose many external costs on society: the risk of being deafened, the annoyance of being awakened in the middle of the night, and so on. Therefore, the market equilibrium quantity of air horns is not equal to the socially optimal quantity. The following graph shows the demand for air horns (their private value), the supply of air horns (the private cost of producing them), and the social cost of air horns, including both 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
Manet Eouitrum
Supply
(Pivate Cost
Socaly Optima Leve
Demand
Prvate value
QUANTITY OF AIR HORNS
POCE OF ARHORNS
Transcribed Image Text:Social Cost Manet Eouitrum Supply (Pivate Cost Socaly Optima Leve Demand Prvate value QUANTITY OF AIR HORNS POCE OF ARHORNS
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