Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases the equilibrium quantity and aligns private costs with social costs.
B
It decreases the equilibrium quantity but creates a surplus.
C
It has no effect on equilibrium quantity since externalities are private matters.
D
It increases the equilibrium quantity, but private costs remain higher than social costs.
Understanding the Answer
Let's break down why this is correct
Answer
A positive externality occurs when a product or activity benefits people who are not directly involved in it, like when someone plants trees that improve air quality for everyone. In such a market, the equilibrium quantity of the good is usually lower than what is socially optimal because the benefits to society are not fully reflected in the market price. When the government provides a subsidy for the good, it lowers the cost for producers or consumers, encouraging more production or consumption of that good. This increase in quantity helps align the private market with the social benefits, leading to greater social efficiency. For example, if the government subsidizes education, more people might attend school, leading to a more educated workforce that benefits society as a whole.
Detailed Explanation
A subsidy helps lower the cost for producers. Other options are incorrect because This answer suggests that a subsidy would reduce the amount produced; This choice implies that externalities don't matter in production decisions.
Key Concepts
Positive Externalities
Subsidies
Market Efficiency
Topic
Subsidies for Positive Externalities
Difficulty
hard level question
Cognitive Level
understand
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