Refer to Figure 10-3. What is the socially optimal quantity of output in this market?

• A. The maximum possible output the market can produce.
• B. The quantity where the private marginal cost curve intersects the demand curve.
• C. The quantity where the social marginal cost curve intersects the demand curve.
• D. The quantity where the supply curve is above the demand curve.

Answer: (C)

Verified step by step guidance

1. Understand the concept of social optimality in the context of market output. The socially optimal quantity is where the total social welfare is maximized, which occurs when the social marginal cost (SMC) equals the marginal benefit (demand).
2. Identify the social marginal cost curve on the graph. This curve reflects the true cost to society of producing each additional unit, including any external costs or benefits not accounted for by private costs.
3. Locate the demand curve on the graph, which represents the marginal benefit or willingness to pay of consumers for each unit of output.
4. Find the point where the social marginal cost curve intersects the demand curve. This intersection represents the quantity where the cost to society of producing one more unit equals the benefit society receives from that unit.
5. Conclude that the socially optimal quantity of output is the quantity at this intersection point, as producing more or less than this quantity would lead to inefficiency or welfare loss.