2. External costs with fixed technology Aa Aa This problem asks you to examine t

Question

2. External costs with fixed technology Aa Aa This problem asks you to examine the costs and benefits in the market for sports utility vehicles (SUVs) in New York The marginal social benefit from the use of SUVs is equal to the sum of the marginal private benefit and any external benefits received by other members of society. The marginal social cost of using SUVs is equal to the sum of the marginal private cost and any external costs imposed on other members of society Assume that there are no external benefits generated by the use of SUVs. Therefore, the marginal private benefit is equal to the marginal social benefit The cost of using SUVs comes in two parts. First, the driver pays the market price for SUVs. In addition, other people who live in the area bear a cost, because they suffer from the pollution created by using SUVs; this is the marginal external cost of using SUVs. Because external costs result from the use of SUVs, the marginal social cost of an SUV exceeds the marginal private cost The following graph shows the demand for SUVs, the marginal private cost of an SUV, and the marginal social cost of producing and using SUVs PRICE (Thousands of dollars per SUVI 30 Demand MSC 25 20 Supply MPC) 10 15 30 45 60 75 90 QUANTITY (Thousands of SUVs According to the graph, if the government does not intervene in the market for SUVs, the equilibrium price of an SUV will be , and drivers will buy SUVs $10,000 $15,000 Which$5,000 statements crrct descrih

Explanation / Answer

without government intervention
MPC=MPB 10000
At this price quantity is 60000

The marginal cost of SUVs is greater than the marginal private cost.
The market outcome is not socially efficient.

this intervention will correct the pollution externality.
15000

Both Policies are equally successful

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