Multiple Choice
Use this diagram to answer the following questions. PD is private demand. SD is social demand.
Based on the figure above, an unregulated market would produce:
515
views
1
rank
7. Externalities
Public Solutions to Externalities
Multiple Choice
Use this diagram to answer the following questions. PD is private demand. SD is social demand.
The figure above contains:
A
A positive externality
B
A negative externality
C
Both positive and negative externalities
D
No externalities
Verified step by step guidance1
Identify the curves on the graph: The graph shows two demand curves, PD (Private Demand) and SD (Social Demand), and one supply curve, S.
Understand the concept of externalities: A positive externality occurs when the social demand (SD) is greater than the private demand (PD), indicating that the social benefits exceed the private benefits. A negative externality would be the opposite, where social demand is less than private demand.
Analyze the graph: Observe that the SD curve is above the PD curve at any given quantity. This suggests that the social value of the good is higher than the private value, indicating a positive externality.
Consider the implications: The presence of a positive externality means that the market equilibrium quantity (where PD intersects S) is less than the socially optimal quantity (where SD intersects S).
Conclude based on the analysis: Since the SD curve is consistently above the PD curve, the diagram represents a situation with a positive externality.
Related Videos
Related Practice
