Figure: Correcting for Market Failure (Figure: Correcting for Market Failure) Assume that there is an external cost involved in the market illustrated in the figure The figure Correcting for Market Failure.If the government forces the private-sector firms to face the external cost, then:
A)the supply curve shifts to the right, from S2 to S1.
B)the supply curve shifts to the left, from S1 to S2.
C)the supply curve is unaffected.
D)price per unit decreases.

Question

Figure: Correcting for Market Failure   (Figure: Correcting for Market Failure) Assume that there is an external cost involved in the market illustrated in the figure The figure Correcting for Market Failure.If the government forces the private-sector firms to face the external cost, then:
A)the supply curve shifts to the right, from S2 to S1. 
B)the supply curve shifts to the left, from S1 to S2. 
C)the supply curve is unaffected. 
D)price per unit decreases.

Quizplus · Accepted Answer

When the government forces private-sector firms to face the external cost, it increases the cost of production for the firms. As a result, the supply curve shifts to the left, from S1 to S2, as the firms are willing to supply less at any given price. This leads to an increase in the price per unit to reflect the increased cost of production.