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. An external benefit exists. This will lead to a(n)
Definitions:
Marginal Propensity
The fraction of an additional unit of income that is spent on consumption rather than being saved.
Consumption Function
The relationship in the economy between consumption and income, other things constant.
Saving Function
The relationship between the level of saving and the level of income, typically showing that saving increases as income increases.
Consumption Function
An economic formula that expresses the relationship between total consumption and gross national income, indicating how much households are likely to spend.
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