Suppose a product produces substantial spillover costs. If the government adopts
ID: 1140290 • Letter: S
Question
Suppose a product produces substantial spillover costs. If the government adopts a policy that forces producers to bear those costs:
the equilibrium quantity of the product exchanged will fall.
the initial misallocation of resources will be corrected.
the equilibrium price of the product will rise.
all of the above will be true.
a.the equilibrium quantity of the product exchanged will fall.
b.the initial misallocation of resources will be corrected.
c.the equilibrium price of the product will rise.
d.all of the above will be true.
Explanation / Answer
Suppose a product produces substantial spillover costs. If the government adopts a policy that forces producers to bear those costs: Answer is option "D" all of the above will be true.
Reason: Just as aan example, the government can increase the taxation on the product. The company involved in the business will try to pass on the additional cost to the cunsumer. This will translate into higher price. At the same time, a higher price can potentially translate into decline in demand and this will shift the demand curve to the left.
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