The figure given below shows the demand and supply curves of automobiles. Figure 13.3 In the figure,
D: Demand curve of automobiles
S: Supply of automobiles prior to the tax
S+t: Supply of automobiles after the tax
Figure 13.3 represents a situation of:

Question

The figure given below shows the demand and supply curves of automobiles. Figure 13.3  In the figure,
D: Demand curve of automobiles
S: Supply of automobiles prior to the tax
S+t: Supply of automobiles after the tax
Figure 13.3 represents a situation of:

Quizplus · Accepted Answer

The figure represents a situation of negative externality, as the equilibrium price and quantity are at P0 and Q0 respectively, which means there is an overproduction of automobiles, causing a negative impact on the environment or society. A tax is imposed to decrease the supply of automobiles to the socially optimal level, which moves the supply curve from S to S+t, and results in a new equilibrium at P1 and Q1. Therefore, the correct answer is C, negative externality.

The Figure Given Below Shows the Demand and Supply Curves