Independence of Marginal External Cost from Wealth under Quasi-Linearity
A key consequence of assuming quasi-linear preferences in externality models is that the Marginal External Cost (MEC) becomes independent of the wealth or income of the affected parties. This means that an individual's willingness to pay to avoid a marginal unit of the externality does not change if their income changes. This simplifies the analysis by making the MEC a function solely of the quantity of the externality-producing activity.
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A key analytical simplification in externality models is the assumption of quasi-linear preferences. This assumption implies that an individual's willingness to pay to avoid a marginal unit of an externality does not change with their level of ____, which in turn prevents the social cost curve from shifting when wealth is redistributed.
Arrange the following statements into a logical sequence that explains why the assumption of quasi-linear preferences is useful for identifying a single, unique efficient outcome in a diagrammatic model of an externality.
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