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 has shifted the market supply curve to the left (S₁) in order to correct for negative externalities. This will result in a decrease in the quantity produced and consumed, shifting towards the socially optimal output level. In diagram (b), the government has shifted the market supply curve to the right (S₂) in order to correct for positive externalities. This will result in an increase in the quantity produced and consumed, shifting towards the socially optimal output level. Therefore, the correct answer is A.

The Graphs Below Refer to Two Separate Product Markets