Refer to the below supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.If government decides to correct this externality with a subsidy to consumers,then the:

Question

Quizplus · Accepted Answer

If the government decides to correct this externality with a subsidy to consumers, it will decrease the cost of consuming the product and therefore increase the demand for it. This will shift the demand curve to the right from D₁ to D₂, leading to a new equilibrium at point B, which is the optimal level of output from society's perspective. The supply curve will not shift as the subsidy is being given to consumers, not producers.

Refer to the Below Supply and Demand Graph