(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 consumers will:

Question

Quizplus · Accepted Answer

When there are external benefits, the social marginal benefit is greater than the private marginal benefit. This means that the demand curve in the market is lower than the social demand curve, resulting in a lower equilibrium quantity and price than what is socially optimal.

By giving a subsidy to consumers, the cost of consumption decreases and the private marginal benefit of consumption increases. This shifts the demand curve to the right, and the new equilibrium occurs at a higher quantity and price. This subsidy helps to move the market closer to the socially optimal level of output, increasing the equilibrium quantity. Therefore, the correct answer is B) increase the equilibrium quantity.

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