Chapter 75, Problem 6MCQ

To determine

The area between two quantities which represent the deadweight loss when external costs cause the socially optimal quantity to fall below the market quantity.

Answer to Problem 6MCQ

From the available options, the correct option is above the MSB curve and below the MSC curve.

Explanation of Solution

When external costs cause the socially optimal quantity to fall below the market quantity then the area between two quantities above the MSB curve and below the MSC curve is the deadweight loss. As the deadweight loss appears between the supply and demand curve which means option d is incorrect and if external costs cause the optimal quantity for the society, then it cannot be placed above the marginal private cost or below the marginal private cost.

Therefore, the correct option is c (above the MSB curve and below the MSC curve)

Economics Concept Introduction

Introduction: When a society incurred the costs due to market inefficiencies, then this situation is called deadweight loss. Here, the demand and supply would be out of equilibrium.