Final answer:
The incorrect statement in the given options is that the government could be taxing producers at Qe when the Marginal Social Benefit is greater than the Marginal Social Cost, as this would suggest a subsidy is needed instead to correct underproduction.The correct answer is option c.
Step-by-step explanation:
The provided scenario involves a government intervention in a market to correct a market failure, often due to spillover costs or externalities not reflected in the market's prices. When the government shifts the market supply curve from S to S1, it is typically trying to move the quantity produced from an initial equilibrium (Qe) to a socially optimal level (Q0). Such actions could include the government imposing taxes on production that has external costs, or, conversely, providing subsidies to encourage production with positive externalities.
The statement that 'the government is correcting spillover costs at Qe' is accurate if we consider that there could be external costs or benefits not accounted for in Qe. The claim that 'the good is being overproduced' could be true if the original equilibrium Qe was greater than the socially optimal level Q0, which happens when negative externalities are present. However, that the government could be 'taxing producers at Qe; the Marginal Social Benefit is greater than the Marginal Social Cost' is not necessarily true because if the Marginal Social Benefit is greater than the Marginal Social Cost at Qe, the market would be underproducing from a social perspective, suggesting that a subsidy rather than a tax is needed. Finally, that 'the government is fixing a market failure' holds true if the government action is intended to align the market outcome with the social optimum.
Considering these explanations, the incorrect statement is (C) 'The government could be taxing producers at Qe; the Marginal Social Benefit is greater than the Marginal Social Cost.'