Question

A subsidy that is used to internalize a positive externality will ideally cause the demand curve to shift __________ to the _____________ curve and output will ____________ to the socially optimal output.

Answer 1

a. rightward

b. MSB

c. increase

Step-by-step explanation:

Externalities are defined as consumption, production and investment decisions made by individuals, households and companies and that affect third parties that do not participate directly in these transactions. Sometimes those indirect effects are minuscule. But when they are large, they can be troublesome; That is what economists call "externalities." Externalities are one of the main reasons that lead governments to intervene in the economy.

When there are externalities, indirect effects are produced that affect the consumption and production opportunities of third parties, but the price of the product does not reflect those externalities. Therefore, private returns and costs are different from those assumed by society as a whole .