Chapter 14R, Problem 8MCQ

To determine

The marginal social cost (MSC) and the marginal external cost (MEC) at the socially optimal equilibrium.

Answer to Problem 8MCQ

From the available options, the correct option is $200, $200.

Explanation of Solution

The socially optimal equilibrium is a point where marginal social cost and marginal social benefit are equal. In this graph, the marginal social cost is equal to the marginal social benefit where the MSC curve cuts MSB. And, here marginal social cost is $200.

And, as the marginal private cost curve is the firm’s supply curve which means at optimal marginal social benefit, MPC is 0. Therefore, the marginal external cost would be:

  $\begin{array}{l}\text{MSC = MEC+MPC}\\ \text{\$200 = MEC+0}\\ \text{MEC = \$200 }\end{array}$

Here, marginal external cost and marginal social benefit cost, both are $200. Therefore, all options: b, c, d, and e are incorrect.

Here, the correct option is a ($200 $200).

Economics Concept Introduction

Introduction: The marginal social cost is the cost which is incurred by the whole society as well as the individual by producing an extra unit of a product. And, the marginal external cost (MEC) is the cost that is changed to other parties than the producer or buyer of the good when an additional unit is produced.