Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $18 and market output of 400 units. How does this outcome compare to the efficient, ideal equilibrium?

A) The efficient price would higher than $18 while the efficient output would be less than 400 units.
B) The efficient price would be higher than $18 while the efficient output would be greater than 400 units.
C) The efficient price would be lower than $18 while the efficient output would be less than 400 units.
D) The efficient price would be lower than $18 while the efficient output would be greater than 400 units.

Question

Vanit Dhanda · Accepted Answer

Final Answer : A, Explanation :  When external costs are present, the market price is too low and the quantity is too high compared to the efficient equilibrium. The efficient price would include the external cost, making it higher, and the efficient output would be lower to account for the externality.

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