Question

To account for the social benefits from the positive externality, the demand curve must shift to the right. The social optimum occurs where the new demand curve crosses the supply curve. The social optimum compared to the market equilibrium yields a higher price and a higher output level." What happens at the social optimum regarding price and output level?

a) Higher price and lower output
b) Lower price and higher output
c) Higher price and higher output
d) Lower price and lower output

Answer 1

At the social optimum, the price and output level are higher compared to the market equilibrium.

Step-by-step explanation:

The social optimum occurs where the new demand curve crosses the supply curve. This means that at the social optimum, both the price and output level will be higher compared to the market equilibrium. The shift in the demand curve to the right is necessary to account for the social benefits from the positive externality.