Refer to the above supply and demand graph.In the graph,point A is the current equilibrium level of output of this product and point B is the optimal level of output from society's perspective.S is the supply curve without a tax and S_t is the supply curve with a tax.This figure indicates that there is (are): A) positive externalities created in the production of this product. B) negative externalities created in the production of this product. C) an underallocation of resources to product production. D) a surplus of the good produced.

Question

Quizplus · Accepted Answer

The supply curve shifts from S to S_t with the imposition of a tax. The new equilibrium moves from point A to point C, which is below the optimal level of output from society's perspective (point B). This implies that the production of this product creates negative externalities that were not taken into account by the market. Therefore, the best answer is B, negative externalities created in the production of this product.

Refer to the Above Supply and Demand Graph