Refer to the Diagram, in Which S Is the Market

Multiple Choice

Refer to the diagram, in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these
External costs is large. If the government wishes to establish an optimal allocation of resources in
This market, it should

A) not intervene because the market outcome is optimal.
B) subsidize consumers so that the market demand curve shifts leftward.
C) subsidize producers so that the market supply curve shifts leftward.
D) tax producers so that the market supply curve shifts leftward.