Refer to the below supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.If government decides to correct this externality with a subsidy to consumers, then the: A)demand curve will shift from D₂ to D₁. B)supply curve will shift from S₁ to S₂. C)demand curve will shift from D₁ to D₂. D)supply curve will shift from S₂ to S₁.

Question

Quizplus · Accepted Answer

A subsidy to consumers will increase their purchasing power, leading to a shift in the demand curve to the right. This means that at any given price, consumers will demand more of the product, leading to a new equilibrium point at a higher quantity and price. Therefore, the demand curve will shift from D₁ to D₂. There will be no effect on the supply curve.

Refer to the Below Supply and Demand Graph