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

question 5

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).
• E) none of the above

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Definitions:

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