Figure 10-8

-Refer to Figure 10-8.If the government wanted to subsidize this market to achieve the socially-optimal level of output,how large would the subsidy need to be?
A) less than $2
B) $2
C) more than $2
D) The size of the subsidy cannot be determined from the figure.

Question

Figure 10-8
 
-Refer to Figure 10-8.If the government wanted to subsidize this market to achieve the socially-optimal level of output,how large would the subsidy need to be?
A) less than $2 
B) $2 
C) more than $2 
D) The size of the subsidy cannot be determined from the figure.

Quizplus · Accepted Answer

The socially-optimal output is where marginal social benefit (MSB) equals marginal social cost (MSC), which is at Qs. At this output level, the market price is equal to $4. However, the producers' marginal cost (MC) is equal to $6, which is greater than the price they receive. To achieve the socially-optimal output, the government would need to subsidize the market by the difference between the MC and the market price, which is $2. Therefore, the subsidy would need to be more than $2 to achieve the socially-optimal output.

Figure 10-8 -Refer to Figure 10-8.If the Government Wanted to Subsidize This