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

Subsidies to consumers will increase demand by making the product more affordable and therefore shifting the demand curve to the right, from D₁ to D₂, resulting in a new equilibrium point at point B where society's optimal level of output is reached. The supply curve remains unchanged.

Refer to the Below Supply and Demand Graph