Use a Graph to Explain Why a Perfectly Competitive Firm

question 34

Essay

Use a graph to explain why a perfectly competitive firm will overproduce if a negative externality is present.

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Definitions:

Long-run Equilibrium

A state in which, given enough time for all adjustments to be made, there is no incentive for firms to enter or exit an industry, and prices stabilize.

Marginal Revenue

The extra income a business earns by selling an additional unit of a product or service.

Marginal Cost

The elevated cost associated with manufacturing an additional unit of a product or service.

Competitive Firm

A company that operates in a market where it competes against other firms for market share and customers.