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.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

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.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

In order to correct for the external cost, the government will impose a tax or regulation that will increase the cost of production. This will cause the supply curve to shift leftwards from S1 to S2. As a result, the equilibrium level of output will fall from Q1 to Q2 and the price will rise from P1 to P2. Therefore, the correct choice is (C) fall; R; W.

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