Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
They increase the supply of goods associated with the positive externality, leading to a higher equilibrium price.
B
They decrease the equilibrium quantity of goods associated with the positive externality.
C
They shift the demand curve to the right, increasing both equilibrium price and quantity.
D
They lead to a socially optimal level of output by correcting underproduction associated with the positive externality.
Understanding the Answer
Let's break down why this is correct
Answer
Subsidies are financial support that the government gives to encourage certain activities or industries. When there are positive externalities, like education or healthcare, the benefits extend beyond just the individuals receiving them. By providing subsidies, the government lowers the cost for consumers, which can lead to an increase in demand for these goods or services. For example, if the government gives subsidies to schools, more parents might choose to enroll their children, leading to better education for the whole community. This increased demand helps to align the market equilibrium with the social benefits, making it more favorable for everyone involved.
Detailed Explanation
Subsidies help produce more goods that have benefits for everyone, like education. Other options are incorrect because This answer suggests that subsidies raise prices, but they actually help lower prices; This option says subsidies reduce the amount produced, which is the opposite of what happens.
Key Concepts
market equilibrium
positive externalities
subsidies
Topic
Analyzing Market Equilibrium with Externalities
Difficulty
hard level question
Cognitive Level
understand
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