The
output level that reflects all the costs and benefits associated with a transaction
i.e. it is the equilibrium that would be achieved if the market outcome reflects the effect of externalities.
The allocatively efficient quantity of output, or the socially optimal quantity, is
where the demand equals marginal cost
, but the monopoly will not produce at this point. Instead, a monopoly produces too little output at too high a cost, resulting in deadweight loss.
The MSC curve is given by MSC=Q+2 → Set the MSC equal to the marginal so- cial benefit (in this case the MSB is the market demand curve) to find the so- cially optimal amount of the good.
30-Q=Q+2 → Q =14
is the socially optimal amount of the good.
The socially optimal
level of consumption of any good or service occurs where the benefit to the user of the last unit consumed
(ie, the MPB) is no more and no less than the total cost borne by society when that unit is consumed (ie, the MSC).
What is optimal level of output?
The optimal level of output is achieved when
firm’s marginal cost becomes equal to its marginal revenue
, that is textit{MC} = textit{MR}.
When output occurs
at the intersection of marginal social benefit (MSB) and marginal social cost (MSC)
, the socially optimal level of output is achieved. Also known as the allocatively efficient level of output. If output occurs at any other level, a market failure exists.
A Socially Optimal Price is
a price where the monopoly reaches allocative efficiency (DARP=MC)
. Since a price ceiling that low would cause some monopolies to incur an economic loss, a Fair Return Price is a viable alternative.
What does P Mc mean in economics?
In perfect competition, any profit-maximizing producer faces a market price equal to its
marginal cost
(P = MC). This implies that a factor’s price equals the factor’s marginal revenue product.
Will a monopoly ever provide a Pareto efficient level of output on its own?
No,
a monopoly’s output cannot be Pareto efficient
because theoretically, in a perfect competition each sells its product at a price determined to be…
Economists define a “socially optimal solution” as “
the optimal distribution of resources in society, taking into account all external costs and benefits as well as internal costs and benefits
.” …
Because
individuals actions fail to account for the impact on others
, a negative externality exists. When a positive externality is present, the market produces less than the socially optimal quantity of the good or service, since there is a benefit to society that is not captured by the individual.
What is a positive externality?
A positive externality occurs
when a benefit spills over
. So, externalities occur when some of the costs or benefits of a transaction fall on someone other than the producer or the consumer.
How do you find optimal output?
The optimal output rule says that
profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to its marginal revenue
.
How do they choose optimal production?
The optimal level of production is where
the marginal revenue (MR) equals the marginal cost (MC)
.
Is equilibrium always at an optimal level of output?
Yes
, the equilibrium is always at an optimal level of output since at this point the demand is always equal to the supply in the market. Explanation: The optimum level of output is when the aggregate supply of output is equal to the aggregate demand of the output.
