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AP® Microeconomics

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Moderate

Externalities: Marginal Social Benefit and Marginal Social Cost

APMICR-EZEGSK

If the production of doughnuts creates a pleasant smell that benefits those who live near the doughnut factory, even though they are not involved in the production or purchase of the doughnuts.

Assuming doughnuts are produced and sold in a perfectly competitive market, which of the following would be TRUE?

A

Marginal social benefit would exceed marginal social cost at equilibrium.

B

Marginal social benefit and marginal social cost would be equal at equilibrium.

C

Marginal social benefit would be less than marginal social cost at equilibrium.

D

The quantity of doughnuts produced will be greater than the allocatively efficient quantity.

E

The market will produce the allocatively efficient quantity.