Figure 5-2
illustrates the market for a product that generates an external cost. S1 is the private market supply curve, while S2 is the supply curve including the external cost. Which of the following is true?
a.
Point a illustrates the competitive private market outcome, while point b illustrates the outcome consistent with economic efficiency.
b.
Point b illustrates the competitive private market outcome, while point a illustrates the outcome consistent with economic efficiency.
c.
The competitive private market outcome is consistent with the conditions for economic efficiency.
d.
The good will tend to be undersupplied relative to the conditions for economic efficiency.
a
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