If government associates an external cost with the production of a good or service, it may correct for the misallocation of resources by shifting the

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When a government recognizes an external cost (a cost not reflected in the market price of a good or service, such as pollution), it may impose taxes or regulations to internalize this cost. This effectively increases the cost of production, which is represented by shifting the supply curve to the left. This shift indicates a decrease in supply at any given price, aiming to correct the misallocation of resources by accounting for the external costs.

If Government Associates an External Cost with the Production of a Good