Question about External Cost (Says benefit but means cost) 2. Given the graph be

Question

Question about External Cost (Says benefit but means cost)

2. Given the graph below: What is the equilibrium price and quantity if this is an unregulated market? What is the external benefit measured in dollars? (Assume the external benefit is the same along the the demand curve) a. b. c. What would be an appropriate solution for the government to mitigate this market d. What would be the outcome of the government's action. What would be the e. In a paragraph or two explain why the an external benefit is a market failure failure? Be specific. regulated output and price? Price Supply Social Private costs External cests Supply Intermal pevate Cos 70 98 Q thousands of packs of cigarettes

Explanation / Answer

a. If this is an unregulated market the equilibrium price would be 7 and the equilibrium quantity would be 98.

b. The external cost will be equal to the vertical distance between the private cost curve and the social cost curve. This is equal to 5 dollars per unit.

c. The government can fix a tax that is equal to the external cost($5).  

d. The outcome of this action will be higher equilibrium price and the reduced equilibrium quantity. The price will become 9 and the quantity will be 70.

e. An external cost occurs when producing a good or services imposes a cost on the third party, there are negative externalities as well as the positive externalities. There social cost will be greater than the private cost if there is negative externality in the market. The existence of the external cost may lead to market failure this is because the general market avoids the external cost.

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