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A-Level Economics · Negative production externality diagram question

A factory pollutes: MSC sits above MPC. Which point is the FREE-MARKET outcome?

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The answer

Point E. Firms only see their PRIVATE costs: MPC crosses D at point E, quantity 5. The market ignores the pollution — firms equate PRIVATE cost with demand, settling where MPC crosses D: point E, quantity 5.

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This is one of 5 questions on the negative production externality diagram — every corner lettered, every wrong answer diagnosed.

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