Question

45. A negative externality or spillover cost occurs when A) firms fail to achieve productive efficiency B) firms fail to achieve allocative efficiency the price of a good exceeds the marginal cost of producing it. the total cost of producing a good exceeds the costs borne by the producer. 46. s, Quantity Quantity Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Qo and that government purposely shifts the market supply curve from S to Si in diagram (a) on the left and from S to S2 in diagram (b) on the right. The shift of the supply curve from S to S2 in diagram (b) might be caused by a per-unit tax on the producers of this product. Bysubsidy paid to the producers of this product C) tax on the buyers of this product. D) subsidy paid to the buyers of this product. 13

Answer 1

Answer to question 45

Negative externality or spillovercost refers to the cost beared by a third party in an economic transaction, of which he/she was not a participant.For example pollution created by factories.Here the cost of cleaning the environment is beared by the society rather than the factory owner.Hence the producer does not bear the full cost of producing the commodity.So negative externality or spillovercost occurs when the total cost of producing a good exceeds the costs borne by the producer.Therefore the answer is option (D).

Answer to question 46

In the diagram(b) the supply curve has shifted towards the right, the new equilibrium is established where the supply curve intersects the demand curve.At this point the quantity supplied is more than that of the previous level.A rightward shift of supply curve occurs when producers are benefited via non price factors.Subsidy given by the government to the producers reduces their cost of production and induces them to produce more causing a rightward shift in supply curve.Hence the answer is option (B) as all other options does not induce producers to produce more