A shift from S 1 to S 2 reflects the change that happens when a negative externality is taken into account. A shift from D 1 to D 2 reflects the change that happens when a positive externality is taken into account.
-Refer to the above figures. Which of the panels would be consistent with the situation in which external benefits exist?
A) Panel 1
B) Panel 2
C) Panels 1 and 2
D) Neither panels

Question

A shift from S 1 to S 2 reflects the change that happens when a negative externality is taken into account. A shift from D 1 to D 2 reflects the change that happens when a positive externality is taken into account.
-Refer to the above figures. Which of the panels would be consistent with the situation in which external benefits exist?
A) Panel 1 
B) Panel 2 
C) Panels 1 and 2 
D) Neither panels

Quizplus · Accepted Answer

Panel 2 is consistent with the situation in which external benefits exist because the social benefit (SS1U1B12) is higher than the private benefit (PS1U1B11) at the same quantity of output (Q1). This reflects the fact that there are additional benefits to society beyond what the producer is considering, indicating the presence of a positive externality. Panel 1 does not show any indication of external benefits or costs.

A Shift from S1 to S2 Reflects the Change That

A Shift from S₁ to S₂ Reflects the Change That