A shift from S1 to S2 reflects the change that happens when a negative externality is taken into account. A shift from D1 to D2 reflects the change that happens when a positive externality is taken into account.Refer to the above figures. Which of the panels would be consistent with the situation in which external costs exist?

A. Panel 1
B. Panel 2
C. Panels 1 and 2
D. neither panel


Answer: A

Economics

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