## Understanding Externalities in Production### Graph Explanation:The graph illustrates the concept of externalities in production with the following elements:- **Axes**: - The vertical axis represents "Price and Costs ($)." - The horizontal axis represents "Quantity (thousands)."- **Lines**: - **D**: A downward-sloping line representing the demand curve. - **SP (MPC)**: An upward-sloping red line representing the private supply curve, or Marginal Private Cost. - **SS (MSC)**: An upward-sloping blue line representing the social supply curve, or Marginal Social Cost.- **Points**: - **e**: Indicates a price of $10 and a quantity of 4,000. - **b**: Indicates a price of $20 and a quantity of 5,000. - **f**: Indicates the intersection of the D and SS curves, with a socially optimal production level. - **g**: Indicates the intersection of the D and SP curves, with a market equilibrium not accounting for externalities.### Question:Based on the graph, the socially optimal level of production is at point $ f $.### Options:- $ e $- $ b $- $ f $ - $ g $### Summary:This graph helps illustrate how externalities, such as pollution, affect the optimal production level compared to private market equilibrium. The socially optimal production level considers the external costs, hence shifting from the private supply curve (SP) to the social supply curve (SS).

Externalities refer to the cost or benefit to a 3rd party who is not a participant in the original market. Externalities can be considered as unpriced products involved in such market transactions. For Instance:- Air pollution from motor vehiclesOption "d" is correct i.e. g Socially optimal level of production is achieved where demand is equal to Marginal Social Cost. Demand = MSC where MSC = Marginal Private Cost + Externality

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(Figure: Determining Externalities) Based on the graph, the socially optimal level of production is at point S (MSC) 60 8 = 50 S (MPC) d= 45 C= 40 E D= 20 a= 10 4. Quantity (thousands) Oe. b. Of Activate Windows Go to Settings to activate W g. Price and Costs ($)

(Figure: Determining Externalities) Based on the graph, the socially optimal level of production is at point S (MSC) 60 8 = 50 S (MPC) d= 45 C= 40 E D= 20 a= 10 4. Quantity (thousands) Oe. b. Of Activate Windows Go to Settings to activate W g. Price and Costs ($)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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