Refer to the below competitive market diagram for product Z.Assume that the current market demand and supply curves for Z are D₂ and S₂.If there are substantial negative externalities associated with the production of Z,it can be argued that:

Question

Quizplus · Accepted Answer

A per unit excise tax on Z would raise the cost of production, leading to a leftward shift in the supply curve toward S₁. This would reduce the equilibrium output and increase the equilibrium price. By doing so, the negative externalities of production would be internalized by the producers of Z, leading to a more efficient allocation of resources. A and D are incorrect as they do not address the issue of negative externalities and may lead to further inefficiencies in resource allocation. B is incorrect as it suggests shifting the demand curve, which is not directly related to the negative externalities associated with production.

Refer to the Below Competitive Market Diagram for Product Z