Question

ter 4 Assignment TIL that Joss Whedon wrote x Chapter 4 & 9 Flashcards X Q x G Q X determine the total contur X Chapter 04 Market Failure + c n ewconnect.mheducation.com/flow/connect.html Help Save & Exit Submit Chapter 4 Assignment 2 Price points 8 042919 Quantity Refer to the diagram, in which Sis the market supply curve and Sy is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should Multiple Choice 0 not intervene because the market outcome is optimal 0 subsidize consumers so that the market demand curve shifts leftward 0 subsidize producers so that the market supply curve shifts leftward. 0 tax producers so that the market supply curve shift lettward. < Prey 2 of 2 !!! Next > Type here to search

Answer 1

The correct answer to this question will be option 4, that is to establish the optimum allocation of resources the government must tax the producers so that supply curve shifts leftwards towards socially optimum allocation. Before explaining why this should be the right answer let's understand why other are not correct.

Option 1 : not intervene because the market outcome is optimum is not correct because the statement itself is incorrect. The socially optimum level of quantity decide by the intersection of total cost (internal+external) that is S1 and the value to consumers indicated by Demand curve. Because after this point the total cost exceeds the value to consumers and society as a whole starts getting worse off. In the given the digram the equilibrium quantity is above optimum level.

Option 2: Again option 2 is not the right answer because it's again incorrect statement. If government starts subsidizing consumers the demand curve will not shift to the left on the contrary it will shift to the right because now with subsidy the consumer can buy more of good at the same price as he save money on every unit of consumption in face of subsidy. and will make condition worse as the equilibrium level of quantity will increase further above the optimum allocation.

Option 3: Again this is not the right answer because it's itself incorrect statement. Because giving subsidy to producer will not shift the supply curve to the left on the contrary it will shift the supply curve to the right because now for producing a single unit of good producer spend less than before as he his cost gets reduced equal to the size of subsidy. So he will be willing to supply more at every price level than before. That's why the supply curve will shift to the right. And as a result will increase the equilibrium level of quantity further above the optimum allocation.

Option 4: This is the only correct statement and the right answer to the question. Taxing producers will shift the supply curve to the left. Now let's understand what happens when government put tax on producers. As government introduce tax on producers their cost of production increases as result they will demand higher price for the same quantity level as before and as a result of which the supply curve will shift leftwards to S1. And the equilibrium allocation in this case will lead to the socially optimum level of resource allocation which is at the intersection of S1 curve and demand curve. Where total cost equals the total value to the consumers measured by the demand curve.

Answer 2

Choice 4 is correct.