The competitive market equilibrium price of sanitation services in a small town with no government-supplied sanitation services is $2 per trash pickup.There is a $1 marginal external benefit associated with each trash pickup.The elasticity of supply of trash pickups is infinite in the long run, implying a horizontal supply curve.To achieve the efficient output of sanitation services, a corrective

Question

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In order to achieve the efficient output of sanitation services, the marginal social benefit (MSB) should equal the marginal social cost (MSC). Since each trash pickup generates a marginal external benefit of $1, the MSB is $3. At the current market equilibrium price of $2, the MSC is less than the MSB, resulting in an inefficiently low output level.
To achieve the efficient output level, the corrective policy should shift the supply curve upwards until it intersects the MSB at a price of $3. Since the supply curve is assumed to be perfectly elastic in the long run, the corrective policy must affect the demand side of the market, by reducing the price paid by consumers of sanitation services to $1 per pickup. This can be achieved through a subsidy to reduce the price paid by consumers or a tax to increase the price received by suppliers. The most appropriate corrective policy in this case is a subsidy that reduces the price paid by consumers of sanitation services to $1 per pickup. Therefore, the correct answer is B.

The Competitive Market Equilibrium Price of Sanitation Services in a Small