Exhibit 17.3

-Refer to Exhibit 17.3,which shows equilibrium in a market in the presence of an externality.If technology is fixed,the discrepancy between the market output and the efficient level of output is eliminated by _____
A)subsidizing production of the good by $10 per unit.
B)imposing a tax of $10 per unit on the firm producing the good.
C)using a quota system to restrict production to 160 units.
D)subsidizing production of the good by $5 per unit.
E)letting the private market operate freely.

Question

Exhibit 17.3
 
-Refer to Exhibit 17.3,which shows equilibrium in a market in the presence of an externality.If technology is fixed,the discrepancy between the market output and the efficient level of output is eliminated by _____
A)subsidizing production of the good by $10 per unit. 
B)imposing a tax of $10 per unit on the firm producing the good. 
C)using a quota system to restrict production to 160 units. 
D)subsidizing production of the good by $5 per unit. 
E)letting the private market operate freely.

Quizplus · Accepted Answer

The efficient level of output is at 160 units, but in the absence of any intervention, the market produces 200 units. This is a negative externality, which causes the market to produce too much of the good. To correct this, a tax of $10 per unit on the firm producing the good will increase their costs and shift their supply curve upward. This will result in a new equilibrium at the efficient level of output (160 units) and a higher price for consumers. The other options either do not address the externality or are not sufficient to eliminate the discrepancy between market output and the efficient level of output.

Exhibit 17.3 -Refer to Exhibit 17.3,which Shows Equilibrium in a Market in in a Market