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 Correcting for Market Failure.If the government intervenes to correct for the external cost, the new ________ will now reflect _.
A)supply curve S1; private and external costs
B)supply curve S2; private but not external costs
C)supply curve S2; private and external costs
D)demand curve (not shown); external but not private costs

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 Correcting for Market Failure.If the government intervenes to correct for the external cost, the new ________ will now reflect _.
A)supply curve S1; private and external costs 
B)supply curve S2; private but not external costs 
C)supply curve S2; private and external costs 
D)demand curve (not shown); external but not private costs

Quizplus · Accepted Answer

When the government intervenes to correct for the external cost, the supply curve will shift upwards to S2, reflecting both private and external costs. This ensures that the market price includes the costs imposed on society due to the externalities. Therefore, the correct answer is choice C, where the supply curve reflects both private and external costs.