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In the figure to the right, why does "including externalities" cause the supply curve Sy to lie above the supply curve S, that has been drawn "excluding externalities"? "Including externalities" causes the supply curve Sy to lie above the supply curve S, that has been drawn "excluding externalities" because S2 Price of Good X per unit S EN O A
In the figure to the right, why does "including externalities" cause the supply curve Sy to lie above the supply curve S, that has been drawn "excluding externalities"? "Including externalities" causes the supply curve Sy to lie above the supply curve S, that has been drawn "excluding externalities" because S2 Price of Good X per unit S EN O A. S, reflects both marginal private and external costs of production, while Sy reflects only marginal private costs of production. O B. Sy reflects marginal social costs of production, while Sy reflects only marginal private costs of production OC. Sy reflects both marginal private and external costs of production, while S, reflects only marginal private costs of production. OD. Sy reflects both average private and external costs of production, while S, reflects only average private costs of production. P D Q2 Q, Quantity of Good X per time period
Expert Solution
S1 reflects the marginal private cost. S2 reflects the marginal social cost (marginal private cost+ external cost). By adding private cost and external cost we get S2. In other words S2 represents the marginal private cost and external cost whereas S1 represents marginal private cost only. When adding private cost with external cost S2 lies above S1.
C. S2 reflects both marginal private and external cost of production, while S1 reflects only marginal private cost of production.
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