The market price for Good X is $10.75, and every time Good X is consumed it creates an external benefit of $3.00. Therefore, which statement is correct?
A) The social benefit of Good X is $13.75, a justification for the government to give buyers a $3.00 subsidy.
B) The social benefit of Good X is $7.75, a justification for the government to give buyers a $3.00 subsidy.
C) The social benefit of Good X is $7.75, a justification for the government to tax sellers $13.75 per unit.
D) The social benefit of Good X is $13.75, a justification for the government to tax sellers $3.00 per unit.

Question

Quizplus · Accepted Answer

The social benefit of Good X is equal to the market price plus the external benefit, which is $10.75+$3.00=$13.75. Therefore, the government can give buyers a $3.00 subsidy to increase consumption and make it equal to the socially optimal level.

The Market Price for Good X Is $10