Encouraging firms to increase production via a subsidy will tend to be socially optimal when:
A)the firms are producing necessities
B)there is excess supply in the market
C)the firms output is associated with large technology spillovers
D)the market equilibrium output level is greater than the social optimum

Question

Quizplus · Accepted Answer

When a firm's output is associated with large technology spillovers, the firm's production will generate benefits for society beyond those captured by the market. Encouraging firms to increase production via a subsidy in this case can lead to a socially optimal level of output, taking into account the positive externalities. Choices A and B may not necessarily lead to socially optimal outcomes. Choice D implies that there is a market failure and a subsidy may be necessary, but does not provide sufficient information to determine whether the socially optimal level of output can be achieved through the subsidy.

Encouraging Firms to Increase Production Via a Subsidy Will Tend