A Pigouvian subsidy

Question

A Pigouvian subsidy

Quizplus · Accepted Answer

A Pigouvian subsidy is a per-unit payment on a good that is set equal to the marginal external benefit at the socially optimal output level. This subsidy helps to correct the market failure caused by negative externalities by incentivizing producers to produce the socially optimal quantity of the good. Therefore, option B is the correct choice. Option A is incorrect because a Pigouvian subsidy can achieve an efficient outcome. Option C is incorrect because the subsidy needs to be set equal to the marginal external benefit at the socially optimal output level, not at the competitive output level. Option D is also incorrect because a Pigouvian subsidy does not lower the MPB vertically.

A Pigouvian Subsidy