The graphs below refer to two separate product markets.Assume that society's optimal level of output in each market is Q₀ and that government purposely shifts the market supply curve from S to S₁in diagram (a) and from S to S₂ in diagram (b).We can conclude that the government is correcting for: A)negative externalities in diagram (a) and positive externalities in diagram (b). B)positive externalities in diagram (a) and negative externalities in diagram (a). C)negative externalities in both diagrams. D)positive externalities in both diagrams.

Question

Quizplus · Accepted Answer

In diagram (a), the government is shifting the market supply curve to the left, which indicates they are attempting to decrease the quantity supplied. This suggests that there are negative externalities, as the current quantity supplied is higher than the optimal level. In diagram (b), the government is shifting the market supply curve to the right, indicating an attempt to increase the quantity supplied. This suggests that there are positive externalities, as the current quantity supplied is lower than the optimal level. Therefore, the correct answer is A.

The Graphs Below Refer to Two Separate Product Markets