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

question 39

Multiple Choice

A positive externality exists and government wants to apply a per-unit subsidy in order to bring about an efficient outcome. Under what condition will the solution (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 efficient level of output than the pre-subsidy output is from the efficient level of output.
• C)Under the condition that the post-subsidy output is farther away from the efficient level of output than the pre-subsidy output is from the efficient level of output.
• D)Under the condition that the subsidy is less than the marginal external benefit (associated with the positive externality).

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Definitions:

Cash Break-even Point

The point at which a business's cash inflows equal its cash outflows, excluding financing.

Degree of Operating Leverage

A ratio that quantifies the sensitivity of a company's operating income to its sales, demonstrating the impact of fixed and variable costs on profitability.

Fixed Costs

Fixed costs that stay the same no matter how much is manufactured or sold, including expenses for rent, employee salaries, and insurance charges.

Hard Rationing

A situation where companies cannot obtain funds for projects despite having positive net present values due to external financing constraints.