If the production of a product or service involves external or spillover benefits, then the government can improve efficiency in the market by:

A. imposing a corrective tax to correct for an overallocation of resources.
B. providing a subsidy to correct for an underallocation of resources.
C. imposing a corrective tax to correct for an underallocation of resources.
D. providing a subsidy to correct for an overallocation of resources.


Answer: B. providing a subsidy to correct for an underallocation of resources.

Economics

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Based on the figure below. Starting from long-run equilibrium at point C, a tax cut that increases aggregate demand from AD to AD1 will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________, if left to self-correcting tendencies. 

A. D; C B. B; C C. B; A D. D; B

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