Graphically, the effects of an external cost can be shown as
A)a leftward shift of the market demand curve.
B)a leftward shift of the market supply curve.
C)a downward movement along the market demand curve.
D)a rightward shift of the market supply curve.

Question

Quizplus · Accepted Answer

An external cost causes a divergence between the private cost and social cost of production. This means that the cost to society is higher than the cost to the producer. As a result, producers will supply too much output at too low a price, since they are not fully accounting for the social cost of production. This will cause a leftward shift of the market supply curve, reflecting the higher cost of production. The equilibrium price will increase and the equilibrium quantity will decrease.

Graphically, the Effects of an External Cost Can Be Shown