If the government overcorrected in a situation of external costs More than the e
ID: 1140320 • Letter: I
Question
If the government overcorrected in a situation of external costs
More than the efficient amount of the good would end up being produced.
Less than the efficient amount of the good would end up being produced.
It would result in a welfare cost in that market that was bigger than the initial welfare cost.
Both a and c are would result.
a.More than the efficient amount of the good would end up being produced.
b.Less than the efficient amount of the good would end up being produced.
c.It would result in a welfare cost in that market that was bigger than the initial welfare cost.
d.Both a and c are would result.
Explanation / Answer
The Government corrects a market situation when there are negative externalities involved in it. The optimum market situation is when the Marginal social cost (MSC) equals Marginal social Benefit (MSB). However, when negative externalities are involved, MSC>MSB. When the Government overcorrects a situation the optimum amount of production level is not reached which results in market failure, thus resulting in inefficient amount of the good being produced. Thus, our solution is option B.