This question refers to Graph B. What would be the economic loss
if a negative externality would imply
that the equilibrium should actually be at (Q0, P1)?
a. Area D
b. Area E
c. Area D + E
d. Area F
e. Area G
Homework Answers
C) area D+E
If the equilibrium is set at Q0P1 it is a case when there is a price floor or price ceiling. In this some of the consumer surplus is transferred to producer and some producer surplus to consumers. The total surplus reduced is known as dead weight loss.
Because of the negative externality the economic loss will be area D plus E as the economy is now working at an inefficient quantity. It has potential to produce more.
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This question refers to Graph B. What would be the economic loss
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b) earn a net economic profit
c) earn a normal profit
d) earn so little that it will close in the long run
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a) face a horizontal demnd curve
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