A shift from S₁ to S₂ reflects the change that happens when a negative externality is taken into account. A shift from D₁ to D₂ reflects the change that happens when a positive externality is taken into account.
-Refer to above figures. Prior to the shift of the curves, which panel and which curve involve the existence of negative externality?
A)Panel 1 and S₁
B)Panel 1 and S₂
C)Panel 2 and D₁
D)Panel 2 and D₂

Question

A shift from S₁ to S₂ reflects the change that happens when a negative externality is taken into account. A shift from D₁ to D₂ reflects the change that happens when a positive externality is taken into account.
-Refer to above figures. Prior to the shift of the curves, which panel and which curve involve the existence of negative externality?
A)Panel 1 and S₁ 
B)Panel 1 and S₂ 
C)Panel 2 and D₁ 
D)Panel 2 and D₂

Quizplus · Accepted Answer

In panel 1, the equilibrium quantity is higher than the socially optimal quantity, indicating that there is an overproduction of the good. This overproduction implies that there is a negative externality associated with the production of the good. Moreover, the shift from S₁ to S₂ reflects the fact that the negative externality is taken into account, causing a decrease in the supply of the good. Therefore, the correct answer is A, panel 1 and S₁.

A Shift from S₁ to S₂ Reflects the Change That