May/June 2026 Paper 33

2026 · 30 questions · 30 parts · 30 marks

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12ExternalitiesHard1 mark
The diagram shows the costs and benefits of the production of a good. The firm is operating at output .
a diagram of marginal private cost (MPC), marginal social cost (MSC) and combined marginal social benefit / marginal private benefit (MSB = MPB) against quantity on the horizontal axis and costs/benefits on the vertical axis. MPC and MSB = MPB cross at point U, above quantity Q$_{1}$ at price P$_{2}$ -- the firm's current output. MSC and MSB = MPB cross at point W, above quantity Q$_{2}$ at price P$_{3}$. Point V lies directly above W on the MPC curve, at quantity Q$_{2}$ and the higher price P$_{1}$, so the vertical gap VW is the difference between MPC and MSC at quantity Q$_{2}$.
What would be necessary to move the production to the optimal level of output?