Suppose that for some abatement equipment market, the MSB = 502 - 1.2Q, and MPB = 302 - 0.8Q, then the Pigouvian subsidy must equal 804 - 2Q at the efficient output level to achieve the efficient output level.

Question

Quizplus · Accepted Answer

The correct Pigouvian subsidy should be equal to the difference between the MSC and the MPB at the efficient output level, not the MSB. The MSC in this case is equal to MSB + Pigouvian subsidy, so the correct subsidy would be 804 - 2Q - (502 - 1.2Q) = 302 + 0.8Q. This means the correct answer is B, as the given Pigouvian subsidy is not equal to the efficient subsidy.

Suppose That for Some Abatement Equipment Market, the MSB =