The graphs below refer to two separate product markets.Assume that society's optimal level of output in each market is Q₀ and that government purposely shifts the market supply curve from S to S₁ in diagram (a)and from S to S₂ in diagram (b).We can conclude that the government is correcting for:

Question

Quizplus · Accepted Answer

In diagram (a), the shift in the market supply curve from S to S₁ indicates that the government is internalizing the negative externalities associated with producing the product. In diagram (b), the shift in the market supply curve from S to S₂ indicates that the government is subsidizing the production of the product to account for positive externalities. Therefore, the correct choice is A, as the government is correcting for negative externalities in diagram (a) and positive externalities in diagram (b).

The Graphs Below Refer to Two Separate Product Markets