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 a negative externality, where the social cost of producing automobiles exceeds the private cost. The equilibrium quantity of automobiles produced and consumed is higher than the socially optimal quantity, leading to a deadweight loss. This situation can be corrected by imposing a tax on the production of automobiles, which will shift the supply curve upwards and reduce the equilibrium quantity to the socially optimal level. Therefore, the correct answer is C.

The Figure Given Below Shows the Demand and Supply Curves