Use the following to answer question(s): Correcting for Market Failure: External Cost

-(Exhibit: Correcting for Market Failure: External Cost) Assume that there is an external cost involved, as illustrated in the exhibit.If the government intervenes to correct for the external cost, the new _______ will now reflect _______ and _______ cost.
A) supply curve S₁; private; external
B) supply curve S₂; private; no external
C) supply curve S₂; private; external
D) demand curve (not shown); external; no private

Question

Use the following to answer question(s): Correcting for Market Failure: External Cost
 
-(Exhibit: Correcting for Market Failure: External Cost) Assume that there is an external cost involved, as illustrated in the exhibit.If the government intervenes to correct for the external cost, the new _______ will now reflect _______ and _______ cost.
A) supply curve S₁; private; external 
B) supply curve S₂; private; no external 
C) supply curve S₂; private; external 
D) demand curve (not shown); external; no private

Quizplus · Accepted Answer

When the government intervenes to correct for external cost, it will shift the supply curve to S₂ (since external cost is not accounted for in the market), and the price will now reflect both the private and external cost. Therefore, the correct answer is supply curve S₂, private cost (as it was already reflected in the market) and external cost (now being accounted for by the government intervention).

Use the Following to Answer Question(s): Correcting for Market Failure