A shift from S1 to S2 reflects the change that happens when a negative externality is taken into account. A shift from D1 to D2 reflects the change that happens when a positive externality is taken into account.
-Refer to the above figures. A positive externality exists that has not been corrected. Price and quantity will be
A) P1 and Q1.
B) P2 and Q2.
C) P3 and Q3.
D) P4 and Q4.

Question

A shift from S1 to S2 reflects the change that happens when a negative externality is taken into account. A shift from D1 to D2 reflects the change that happens when a positive externality is taken into account.
-Refer to the above figures. A positive externality exists that has not been corrected. Price and quantity will be
A) P1 and Q1. 
B) P2 and Q2. 
C) P3 and Q3. 
D) P4 and Q4.

Quizplus · Accepted Answer

A positive externality means the social benefit is greater than the private benefit. In this case, D1 reflects the private demand for the product, while S1 reflects the private supply. However, when the positive externality is taken into account, the social demand (D2) is higher than the private demand and the social supply (S2) is lower than the private supply. The intersection of the social demand and supply curves is at point Q3 and P3, where the quantity demanded and supplied is higher and the price is lower compared to where only private costs and benefits are considered (i.e., at point Q1 and P1). Therefore, the correct answer is C, P3 and Q3.

A Shift from S1 to S2 Reflects the Change That