Question

Table 10-4

Quantity	Private Value	Private Cost	External Cost
1	$40	$20	$7
2	$38	$23	$7
3	$36	$26	$7
4	$34	$29	$7
5	$32	$32	$7
6	$28	$35	$7

Refer to Table 10-4. Take into account private and external costs and assume the quantity of output is always a whole number (that is, fractional units of output are not possible). The maximum total surplus that can be achieved in this market is

Group of answer choices

$19.

$21.

$24.

$28.

Answer 1

Quantity	Private value	Private cost	External cost	Social cost
1	40	20	7	27
2	38	23	7	30
3	36	26	7	33
4	34	29	7	36
5	32	32	7	39
6	28	35	7	42

Social cost = Private cost + External cost

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A quantity will be produced till private value is higher than or equal to social cost.

Therefore, only 3 quantities will be produced because the private value of 4 quantities is less than the social cost.

Surplus = (Private value - Social cost)

=> Total Surplus = Surplus from 1 quantity + Surplus from 2 quantity + Surplus from 3 quantity

=>Total surplus = (Private value of 1st quantity - Social cost of 1st quantity) + (Private value of 2nd quantity - Social cost of 2nd quantity) + (Private value of 3rd quantity - Social cost of 3rd quantity)

=> Total surplus = (40 -27) + (38 - 30) + (36 -33)

=> Total surplus = 13 + 8 + 3

=> Total surplus = 24

The maximum total surplus that can be achieved in this industry is $24

Answer: Option (C)