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

The government should tax producers so that the market supply curve shifts leftward (upward). This will increase the cost of production and incentivize producers to reduce their output, leading to a decrease in the quantity supplied and a higher price. This will reduce the consumption of the good with external costs, thereby reducing the negative effects on society. A tax on producers also creates an incentive for them to reduce their emissions and other external costs associated with production. Ultimately, this will result in an optimal allocation of resources that takes into account the external costs.

Refer to the Diagram in Which S Is the Market