The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16- 2
-For a production process that involves a positive externality,it is true that

Question

The diagram below shows demand and supply curves for some perfectly competitive market.
  FIGURE 16- 2
-For a production process that involves a positive externality,it is true that

Quizplus · Accepted Answer

A positive externality means that the social benefit of producing the good is greater than the private benefit. This means that the demand curve (which reflects private benefit) understates the social benefit. As a result, the market will produce less than the socially optimal level of output. To reach the socially optimal level of output, the quantity produced needs to increase. A subsidy to producers would shift the supply curve to the right, increasing the quantity produced and moving closer to the socially optimal level. A per unit tax would shift the supply curve to the left, decreasing the quantity produced and moving closer to the socially optimal level. Therefore, option B is correct.

The Diagram Below Shows Demand and Supply Curves for Some