Figure 10-8
-Refer to Figure 10-8.If the government wanted to subsidize this market to achieve the socially-optimal level of output,how large would the subsidy need to be?

Question

Figure 10-8 
-Refer to Figure 10-8.If the government wanted to subsidize this market to achieve the socially-optimal level of output,how large would the subsidy need to be?

Quizplus · Accepted Answer

The socially optimal level of output is where the marginal social benefit (MSB) equals the marginal social cost (MSC). In this case, it occurs at a quantity of 6 units of output. At this quantity, the price consumers are willing to pay (MSB) is $8, while the marginal cost of production (MSC) is $10. Therefore, to achieve this level of output, the government would need to subsidize the market by the difference between MSB and MSC at the socially optimal quantity, which is $2 per unit. This would bring the market price down from $10 to $8 and enable the market to produce 6 units. Thus, the subsidy needs to be more than $2 to achieve the socially-optimal level of output.

Figure 10-8 -Refer to Figure 10-8.If the Government Wanted to Subsidize This