(Figure: A Competitive Market in the Presence of Externalities) Use Figure: A Competitive Market in the Presence of Externalities. Given the figure, if there are external benefits, a subsidy given to sellers will:

Question

Quizplus · Accepted Answer

In the presence of external benefits, the social marginal benefit, represented by S1, is greater than the private marginal benefit, represented by D, so the socially optimal quantity is higher than the market equilibrium quantity. A subsidy given to sellers will shift the supply curve to the right, from S0 to S2, which will lead to an increase in both the equilibrium quantity and price. Therefore, the best choice is B: increase the equilibrium quantity.

(Figure: a Competitive Market in the Presence of Externalities) Use