9. Assume D1 reflects private benefits from consumption and assume S1 reflects p

Question

9. Assume D1 reflects private benefits from consumption and assume S1 reflects private costs of production. If we begin with demand curve D1 and supply curve S1 in the figure above and external costs are incorporated into this market, then

          a.   government should subsidize its production and shift supply from S1 to S2.

          b.   the vertical distance between S1 and S2 equals external costs.

          c.   price will increase from P1 to P4.

          d.   underproduction equals Q3 minus Q1.

          e.   price will rise from P1 to P3.

Explanation / Answer

Answer
Option b
the supply curve shifts to the left because of external cost taxes and that will decrease quantity to its socially efficient level which increases the price but decreases the deadweight loss.

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