Question

Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should

Answer 1

tax producers so that the market supply shift leftward (upward)

Step-by-step explanation:

Since S is the market supply curve, and S1 is the supply curve composed of all the other costs of production even external costs.

We recognize that external costs are the expenses involved when such goods and services are generated by third parties (who were not a part of the transaction).

A company's output imposes higher external costs on the people and hence the people most affected by such external costs is large.

Therefore, if the government needs to launch an appropriate resource allocation wherein resources are efficiently allocated at least contribute, the producers should be taxed.

The costs of production rise whenever the producers are taxed, which reduces the quantity given.

This will upward shift the supply curve from S to S1 to the left.