Refer to the above supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.The amount of the subsidy to be given to producers to correct this externality problem would be:

Question

Quizplus · Accepted Answer

To correct this externality problem, the optimal output level from society's perspective (B) needs to be achieved. To reach point B, the quantity supplied needs to increase to Q2. The subsidy required to incentivize producers to increase output from Q1 to Q2 would be equal to the difference in the cost of production at these two quantities, which is represented by line EF. Therefore, the subsidy would be equal to the vertical distance between line EF and the original supply curve at Q1, which is equal to the distance between points A and C. Hence, the correct answer is option C.

Refer to the Above Supply and Demand Graph