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. An external benefit exists. This will lead to a(n)
A) underproduction equal to Q1 minus Q2.
B) overproduction equal to Q4 minus Q3.
C) underproduction equal to Q4 minus Q3.
D) overproduction equal to Q1 minus Q2.

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. An external benefit exists. This will lead to a(n)
A) underproduction equal to Q1 minus Q2. 
B) overproduction equal to Q4 minus Q3. 
C) underproduction equal to Q4 minus Q3. 
D) overproduction equal to Q1 minus Q2.

Quizplus · Accepted Answer

An external benefit leads to a shift in the demand curve to the right (from D1 to D2), resulting in an increase in both equilibrium price and quantity. However, since the market does not take into account the external benefit, the actual quantity produced is equal to Q3, which is less than the socially optimal quantity Q4. Therefore, the market outcome leads to underproduction equal to the difference between Q4 and Q3, which is equal to option C.

A Shift from S1 to S2 Reflects the Change That