Refer to the graph above. Suppose that its shows the S and D graphs in a market where production entails a significant amount of pollution. In this case, the government should use its coercive power to make:

Question

Quizplus · Accepted Answer

Since production in this market entails a significant amount of pollution, the negative externality is not reflected in the market price. As a result, the market quantity produced and consumed is higher than the socially optimal level. To correct this market failure, the government can force firms to internalize the cost of pollution by implementing regulations or taxes. By doing so, the supply curve will shift to the left, which reduces the quantity supplied and increases the price. This will help align the market outcome with the socially optimal level. Shifting the demand curve to the left or right would not directly address the pollution externality.

Refer to the Graph Above