H4 Jnternalising a positive production externality will caus

H4. Jnternalising a positive production externality will cause the demand curve faced by an industry to: Av shift to the right B. shift to the left C. become more elastic D. remain unchanged

Solution

Correct option is (D).

A positive externality in production results in a social marginal cost (SMC) that is lower than private marginal cost (PMC). Internalizing this externality will cause the PMC curve to shift rightward to SMC, leading to lower price and higher output compared to the case when this was not internalized. But demand curve remains unchanged.

Note that demand curve would have shifted rightward (leftward), if there was a positive (negative) externality in consumption.