Consider a good with external costs. Which of the following descriptions characterizes quantities of goods between the market equilibrium quantity and the allocatively efficient quantity?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aThese quantities will not be produced by the private market, but the government can add these quantities to production using a subsidy, resulting in higher economic efficiency.bThese quantities will not be produced by the private market, but the government can add these quantities to production using a tax, resulting in higher economic efficiency.cThese quantities will be produced by the private market, but the government can eliminate these quantities from production using a subsidy, resulting in higher economic efficiency.dThese quantities will be produced by the private market, but the government can eliminate these quantities from production using a tax, resulting in higher economic efficiency.
Question
Consider a good with external costs. Which of the following descriptions characterizes quantities of goods between the market equilibrium quantity and the allocatively efficient quantity?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aThese quantities will not be produced by the private market, but the government can add these quantities to production using a subsidy, resulting in higher economic efficiency.bThese quantities will not be produced by the private market, but the government can add these quantities to production using a tax, resulting in higher economic efficiency.cThese quantities will be produced by the private market, but the government can eliminate these quantities from production using a subsidy, resulting in higher economic efficiency.dThese quantities will be produced by the private market, but the government can eliminate these quantities from production using a tax, resulting in higher economic efficiency.
Solution 1
The correct answer is a. These quantities will not be produced by the private market, but the government can add these quantities to production using a subsidy, resulting in higher economic efficiency.
Here's why:
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A good with external costs means that the production or consumption of the good has a negative impact on third parties. This could be pollution from a factory, for example.
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The market equilibrium quantity is the amount of the good that would be produced and consumed in a free market, without any government intervention.
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The allocatively efficient quantity is the amount of the good that would be produced and consumed if the external costs were taken into account. This is typically less than the market equilibrium quantity.
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If the government wants to move production from the market equilibrium quantity to the allocatively efficient quantity, it needs to reduce the amount of the good being produced.
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A subsidy is a payment from the government to producers, which encourages more production. This would move production away from the allocatively efficient quantity, not towards it.
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A tax, on the other hand, increases the cost of production and discourages production. This could move production towards the allocatively efficient quantity.
So, the correct answer is that these quantities will not be produced by the private market, but the government can add these quantities to production using a subsidy, resulting in higher economic efficiency.
Solution 2
The correct answer is a. These quantities will not be produced by the private market, but the government can add these quantities to production using a subsidy, resulting in higher economic efficiency.
Here's why:
When a good has external costs, it means that producing or consuming the good has a negative effect on third parties. This could be pollution from a factory, for example.
In a free market, producers and consumers do not take these external costs into account. They only consider their private costs and benefits. As a result, the market equilibrium quantity (the quantity where supply equals demand) is higher than the allocatively efficient quantity (the quantity that maximizes social welfare, taking into account both private and external costs).
In other words, the market produces too much of the good.
To correct this, the government can impose a tax on the good. This makes the good more expensive to produce or consume, which reduces the quantity produced and consumed. This brings the quantity closer to the allocatively efficient quantity.
So, the quantities of goods between the market equilibrium quantity and the allocatively efficient quantity will not be produced by the private market, but the government can eliminate these quantities from production using a tax, resulting in higher economic efficiency.
Similar Questions
Consider a good with external benefits. Which of the following best describes why the market does not produce an allocatively efficient amount?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aThe marginal private cost of production equals both the marginal private benefit of production and the marginal social benefit of production.bThe marginal private cost of production equals the marginal private benefit of production but is less than the marginal social benefit of production.cThe marginal private cost of production exceeds the marginal social benefit of production but equals the marginal private benefit of production.dThe marginal private benefit of production exceeds both the marginal private cost of production and the marginal social benefit of production.
What can you say about the equilibrium quantity of production for a market with external costs?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aThe equilibrium market quantity is too high and the equilibrium market price is too low, relative to the efficient point.bThe equilibrium market quantity is too low and the equilibrium market price is too high, relative to the efficient point.cThe equilibrium market quantity is too low and the equilibrium market price is too low, relative to the efficient point.dThe equilibrium market quantity is too high and the equilibrium market price is too high, relative to the efficient point.
What can you say about the allocatively efficient level of output compared to the new equilibrium market quantity after the tax (that is the same size as the external cost per unit of output) on producers described above is imposed?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aThey are the same.bThe equilibrium market quantity is greater.cThe allocatively efficient quantity is greater.dYou cannot tell from the information given.
Suppose the production of a good in a competitive market has a negative externality. Which of the following is true? a) The social marginal cost curve lies to the left of the market supply curve, and the market equilibrium quantity is less than the allocatively efficient output. b) The social marginal cost curve lies to the left of the market supply curve, and the market equilibrium quantity is at the allocatively efficient output. c) The social marginal cost curve lies to the left of the market supply curve, and the market equilibrium quantity is more than the allocatively efficient output. d) The social marginal cost curve lies to the right of the market supply curve, and the market equilibrium quantity is less than the allocatively efficient output. e) The social marginal cost curve lies to the right of the market supply curve, and the market equilibrium quantity is more than the allocatively efficient output.
Fill in the Blank QuestionFill in the blank question.When an economy uses its resources to maximize people's well-being by producing a specific mix of goods and services, it is called efficiency.
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