A shift from S₁ to S₂ reflects the change that happens when a negative externality is taken into account. A shift from D₁ to D₂ reflects the change that happens when a positive externality is taken into account.
-Refer to the above figures. An external benefit exists. This will lead to a(n)
A)underproduction equal to Q₁ minus Q₂.
B)overproduction equal to Q₄ minus Q₃.
C)underproduction equal to Q₄ minus Q₃.
D)overproduction equal to Q₁ minus Q₂.

Question

A shift from S₁ to S₂ reflects the change that happens when a negative externality is taken into account. A shift from D₁ to D₂ reflects the change that happens when a positive externality is taken into account.
-Refer to the above figures. An external benefit exists. This will lead to a(n)
A)underproduction equal to Q₁ minus Q₂. 
B)overproduction equal to Q₄ minus Q₃. 
C)underproduction equal to Q₄ minus Q₃. 
D)overproduction equal to Q₁ minus Q₂.

Quizplus · Accepted Answer

An external benefit leads to an underproduction, meaning that the quantity produced is less than the socially optimal level. In the figures above, this is represented by a shift from S₁ to S₂, which results in a decrease in the quantity produced from Q₄ to Q₃. Choice C accurately reflects this situation, as it states that there will be an underproduction equal to Q₄ minus Q₃.

A Shift from S₁ to S₂ Reflects the Change That