Multiple Choice
Use this diagram to answer the following questions. PD is private demand. SD is social demand.
Based on the figure above, an unregulated market would produce:
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Use this diagram to answer the following questions. PD is private demand. SD is social demand.
A per-unit _______________________ would result in the production of the socially optimal quantity.
A
Tax of \$10
B
Tax of \$20
C
Subsidy of \$10
D
Subsidy of \$20
Verified step by step guidance1
Identify the intersection points of the supply curve (S) with the private demand curve (PD) and the social demand curve (SD) on the graph.
Note the quantity at which the private demand (PD) intersects with the supply (S). This is the quantity produced without any intervention.
Observe the quantity at which the social demand (SD) intersects with the supply (S). This is the socially optimal quantity.
Calculate the difference in price between the private demand (PD) and social demand (SD) at the socially optimal quantity. This difference represents the per-unit subsidy needed.
Conclude that a per-unit subsidy equal to the price difference calculated in the previous step would result in the production of the socially optimal quantity.
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