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The markets below show conditions in a perfectly competitive market in which there is some sort of externality Market A Market B S=MSC MSC MSB DEMSB D Quantity Quantity Market C Market D S=MSC MSC $ X MSB DEMSB Quantity Quantity 17
The markets below show conditions in a perfectly competitive market in which there is some sort of externality Market A Market B S=MSC MSC MSB DEMSB D Quantity Quantity Market C Market D S=MSC MSC $ X MSB DEMSB Quantity Quantity 17. A corrective subsidy to producers would lead to an efficient level of output in Market A. 18. A corrective subsidy to producers would lead to an efficient level of output in Market B. 19. A corrective tax on producers would lead to an efficient level of output in Market C. 20. A corrective tax on producers would lead to an efficient level of output in Market D. Use the following information to answer the next TWO questions: Consider the market for cigarettes where there exists a negative externality and a corrective tax. 21. There are no external costs in the market with the corrective tax. 22. There is no deadweight loss in the market with the corrective tax.
Expert Solution
Answer:
17. The statement matched and right with figure of market - A. The statement in (17) match with Market - A. Because when there is subsidy is given to producer for socially efficient output, the supply curve shift towards right. In the above figure - A i.e in Market - A supply curve has shifted rightward. Here we will get socially efficient outcome.
18. The statement does not match and wrong with figure of market - B. The statement in (18) does not match with Market- B. Because a corrective subsidy to producer will always lead to rightward shift of supply curve. But in market - B , the demand curve has shifted rightward. In the figure the MSB is showing rightward shift of demand curve. In this case we will not have any social efficient outcome.
19. The statement does not match and wrong with figure of market - C. Because corrective tax on producers would lead to shift of supply of curve to left. But in the figure the shift of demand curve towards left. The figure shows the corrective tax imposed on consumer but in the statement (19) there has been told about corrective tax on producers. In case of corrective tax on producers the supply curve shift leftward not demand curve. In this case there will be no social efficient outcome.
20. The statement matched and right with figure of market - D. The corrective tax on producer leads to leftward shift of supply curve. It means MSC will be left of supply. The figure of market - D also shows similar things. So, statement in (20) matched with figure of market - D. There will be social efficient outcome.
21. A market of cigarettes where there exists a negative externality and a corrective tax.
No, there is a external cost after corrective tax policy. Because there will be external cost because the the demand curve with tax shift leftward. But there will be still external cost associate with that. Through tax we just try to internalise the external cost.
22. No, there will be dead weight loss (DWL). When we will impose any corrective tax to internalise the external there will be dead weight loss. Because after imposition of tax there will be loss of surplus. As there will be loss of surplus, so we will get dead weight loss (DWL).
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