Question

So, what happens to quantity in the case that markets are modified to behave according to incentives, and the supply and demand curves adjust to become social-value and social-cost curves?

a) Quantity increases due to increased government intervention.
b) Quantity decreases due to the reduction of market forces.
c) Quantity remains unchanged as markets self-adjust.
d) Quantity fluctuates unpredictably.

Answer 1

The impact on quantity is context-dependent, but if markets are modified to internalize externalities, it could lead to a more socially optimal quantity, potentially increasing or decreasing based on the nature of the intervention.

This correct answer is d) Quantity fluctuates unpredictably

Step-by-step explanation:

The question is asking what happens to the quantity of goods produced or consumed in a market when the supply and demand curves are adjusted to reflect social costs and social values, rather than just private costs and benefits.

The adjustment process in a market economy tends to occur with little government intervention.

However, if the government steps in to modify the market, the result could be any of the options provided depending on the extent and nature of the intervention.

For example, if a regulator sets a production quantity and price to where the marginal cost crosses the demand curve (Point C), this could reflect a socially optimal point that includes externalities not considered in the private market.

This does not necessarily increase quantity due to government intervention (a), decrease it due to reduced market forces (b), keep it unchanged (c), or make it fluctuate unpredictably (d), as the actual outcome depends on the specific circumstances and actions taken by the regulator.

This correct answer is d) Quantity fluctuates unpredictably