How do external costs prevent a competitive market from allocating resources efficiently?
What will be an ideal response?
External costs create a marginal social cost (MSC) that exceeds the marginal private cost (MC) for producing or consuming a good or service. That is, with an external cost, MSC > MC. When the firm produces a good or service with an external cost, it chooses to produce the quantity at which marginal cost equals marginal benefit, MC = MB. Marginal benefit equals marginal social benefit, MSB. In this case, the firm produces the quantity at which MC = MSB. This level of production exceeds the level at which MSC = MSB. Too much of the good or service is produced, resulting in an inefficient allocation of resources.
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The figure above shows the market for annual influenza immunizations the United States. The market equilibrium with no government intervention is ________ because health care generates ________
A) efficient; positive external benefits B) inefficient; positive external benefits C) inefficient; positive external costs D) efficient; positive external costs E) inefficient; public goods
Use the following graph for a competitive market to answer the question below.
In a market with supply and demand curves as shown above, a price floor of $2.50 will result in
A. a black-market price greater than $2.50. B. a surplus of 10 units. C. a shortage of 10 units. D. no shortage or surplus.