Use the following figure to answer the question : Figure 20-2 : shows the competitive supply curve of a commodity is given by S 1 ,the private marginal benefit curve is D 1 ,the marginal social benefit curve is D 2 ,and the MB E curve reflects the marginal external benefits.
-Refer to Figure 20-2.If the government provides a subsidy of $8 per unit of output,then the:
A)marginal social benefit will exceed the marginal social cost and the good will be underproduced.
B)marginal social cost will exceed the marginal social benefit and the good will be underproduced.
C)marginal social benefit will exceed the marginal social cost and the good will be overproduced.
D)marginal social cost will exceed the marginal social benefit and the good will be overproduced.

Question

Use the following figure to answer the question : Figure 20-2 : shows the competitive supply curve of a commodity is given by S 1 ,the private marginal benefit curve is D 1 ,the marginal social benefit curve is D 2 ,and the MB E curve reflects the marginal external benefits. 
-Refer to Figure 20-2.If the government provides a subsidy of $8 per unit of output,then the:
A)marginal social benefit will exceed the marginal social cost and the good will be underproduced. 
B)marginal social cost will exceed the marginal social benefit and the good will be underproduced. 
C)marginal social benefit will exceed the marginal social cost and the good will be overproduced. 
D)marginal social cost will exceed the marginal social benefit and the good will be overproduced.

Quizplus · Accepted Answer

When the government provides a subsidy, it effectively lowers the cost of production for producers, which can lead to an increase in supply. This can result in the marginal social cost (MSC) being lower than the marginal social benefit (MSB), leading to overproduction of the good. However, without seeing Figure 20-2, the explanation assumes typical economic outcomes of subsidies. If the subsidy causes the cost to producers to be artificially low, more of the good is produced than what is socially optimal, hence MSC exceeds MSB, leading to overproduction.

Use the Following Figure to Answer the Question : Figure