An appropriate way for government to intervene when external diseconomies exist in an industry is to
A) shift the industry demand curve to the right by subsidizing consumers.
B) shift the industry supply curve to the left by taxing producers.
C) subsidize the industry to raise its profits.
D) encourage imports of the good to replace domestic production.
E) make the industry's supply curve more nearly reflect the supply curve of a competitive industry.

Question

Quizplus · Accepted Answer

When external diseconomies exist in an industry, the industry is producing at a level where the marginal social cost (MSC) is greater than the marginal private cost (MPC). To correct this market failure, government intervention is required. One effective way for the government to intervene is by imposing a tax on producers, which will shift the industry supply curve to the left, making the industry's supply curve more nearly reflect the supply curve of a competitive industry by internalizing the external costs. By shifting the supply curve to the left, production will decrease, leading to a reduction in pollution or other negative externalities associated with the industry.

An Appropriate Way for Government to Intervene When External Diseconomies