If in an attempt to correct an externality the government sets a Pigouvian subsidy too high the equilibrium quantity will be:
A) higher than the efficient quantity.
B) lower than the efficient quantity.
C) equal to the efficient quantity.
D) zero.

Question

Quizplus · Accepted Answer

A Pigouvian subsidy is designed to increase the quantity of a good with a positive externality (such as education or vaccination) so that the marginal social benefit (MSB) equals the marginal private benefit (MPB). However, if the subsidy is set too high, it will artificially increase the MPB and lead to an overproduction of the good beyond the efficient level. This is because the sellers can keep increasing the price while the buyers are willing to pay more due to the subsidy, which creates a deadweight loss. Therefore, the equilibrium quantity will be higher than the efficient quantity when the Pigouvian subsidy is set too high.

If in an Attempt to Correct an Externality the Government