Refer to the diagram in which S is the market supply curve and S₁ is a supply curve comprising all costs of production, including external costs.Assume that the number of people affected by these external costs is large.If the government wishes to establish an optimal allocation of resources in this market, it should: A)not intervene because the market outcome is optimal. B)subsidize consumers so that the market demand curve shifts leftward. C)subsidize producers so that the market supply curve shifts leftward (upward). D)tax producers so that the market supply curve shifts leftward (upward).

Question

Quizplus · Accepted Answer

To establish an optimal allocation of resources, the government must internalize the external costs. One way to achieve this is by imposing a tax on the producers, which would increase their costs of production and shift the market supply curve leftward (upward). This would lead to a higher market price and lower quantity traded, which would reduce the negative externality caused by the production. Subsidizing consumers or producers would not address the external cost issue, and not intervening would result in an inefficient outcome.

Refer to the Diagram in Which S Is the Market