A positive externality exists and government wants to apply a per-unit subsidy in order to bring about the socially optimal output. Under what condition will the solution (of the subsidy)be worse than the problem (the market failure)?
A)Under the condition that the subsidy is greater than the marginal external benefit (associated with the positive externality).
B)Under the condition that the post-subsidy output is not farther away from the socially optimal output than the pre-subsidy output is from the socially optimal output.
C)Under the condition that the post-subsidy output is farther away from the socially optimal output than the pre-subsidy output is from the socially optimal output.
D)Under the condition that the subsidy is less than the marginal external benefit (associated with the positive externality).

Question

Quizplus · Accepted Answer

If the subsidy is not able to shift the market output closer to the socially optimal output compared to the pre-subsidy output, then the government intervention would not bring any significant benefit in correcting the market failure. This would result in the solution being worse than the problem, as the government spending on the subsidy would not achieve the intended outcome.

A Positive Externality Exists and Government Wants to Apply a Per-Unit