📚 Learning Guide
Effects of Taxes and Subsidies
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Taxes on goods that are underproduced are to market efficiency as subsidies on goods with negative externalities are to what?

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Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
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4
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Choose the Best Answer

A

Overproduction

B

Efficient allocation

C

Increased deadweight loss

D

Market equilibrium

Understanding the Answer

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Answer

Taxes on goods that are underproduced help to improve market efficiency by encouraging more production of those goods. Similarly, subsidies on goods that have negative externalities aim to correct market failure and promote the production of goods that benefit society. For example, if a factory produces clean energy but is not making enough profit, a subsidy can help it produce more, which benefits the environment and public health. By providing financial support, the government encourages the production of goods that have positive effects, balancing out the negative impacts of other activities. In this way, subsidies help to align private incentives with social benefits, promoting overall market efficiency.

Detailed Explanation

Subsidies encourage more production of goods that cause harm. Other options are incorrect because Some might think subsidies help allocate resources well; People might confuse subsidies with deadweight loss.

Key Concepts

Impact of Taxes on Market Efficiency
Effects of Subsidies on Production Outcomes
Deadweight Loss
Topic

Effects of Taxes and Subsidies

Difficulty

medium level question

Cognitive Level

understand

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