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.When the government intervenes to correct for the external cost, the output will ________ from ________ to _.
A)fall; W; R
B)increase; W; R
C)fall; R; W
D)fall; W; 0

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.When the government intervenes to correct for the external cost, the output will ________ from ________ to _.
A)fall; W; R 
B)increase; W; R 
C)fall; R; W 
D)fall; W; 0

Quizplus · Accepted Answer

When there is an external cost, the actual cost to society is higher than the cost paid by consumers in the market. This leads to overproduction of the good, as producers do not take into account the full cost to society. When the government intervenes, it can impose a tax equal to the amount of the external cost, which would increase the cost to producers and shift the supply curve upward. The new equilibrium point would be at lower output (fall from W to R) and higher price (rise from W to R). Therefore, the correct choice is (C) fall; R; W.