For a government subsidy on a good with an external benefit to result in the efficient amount of output being produced, what must be done?
A) Private production and private consumption must both be directly subsidised.
B) The quantity demanded must be decreased to the efficient amount.
C) The government must produce the product.
D) Private production without the subsidy must be prohibited.
E) The size of marginal external benefit must be accurately determined.

Question

Quizplus · Accepted Answer

To ensure that the subsidy leads to the efficient amount of output being produced, the size of the marginal external benefit must be accurately determined. This is because the subsidy should be equal to the marginal external benefit so that the private cost to the producer is equal to the social cost to society. This will lead to the producer choosing the quantity of output that is socially optimal, resulting in the efficient amount of output being produced. Therefore, option E is the best choice.

For a Government Subsidy on a Good with an External