Suppose that cookie producers create a positive externality equal to $2 per dozen.Further suppose that the government offers a $2 per-dozen subsidy to the producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced?
A) The equilibrium quantity is greater than the socially optimal quantity.
B) The equilibrium quantity is less than the socially optimal quantity.
C) They are equal.
D) There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The subsidy of $2 per dozen internalizes the positive externality, aligning the equilibrium quantity with the socially optimal quantity.

Suppose That Cookie Producers Create a Positive Externality Equal to $2