A Positive Externality Exists and Government Wants to Apply a Per-Unit

question 8

Multiple Choice

A positive externality exists and government wants to apply a per-unit subsidy in order to bring about the socially optimal output. Under what condition will the solution (of the subsidy) be worse than the problem (the market failure) ?

• A)Under the condition that the subsidy is greater than the marginal external benefit (associated with the positive externality).
• B)Under the condition that the post-subsidy output is not farther away from the socially optimal output than the pre-subsidy output is from the socially optimal output.
• C)Under the condition that the post-subsidy output is farther away from the socially optimal output than the pre-subsidy output is from the socially optimal output.
• D)Under the condition that the subsidy is less than the marginal external benefit (associated with the positive externality).
• E)none of the above

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