In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:
A) a tax of $5 in Market X and a subsidy of $10 in Market Y.
B) subsidizing both markets.
C) taxing Market Y and subsidizing Market X.
D) taxing both markets.

Question

Quizplus · Accepted Answer

Market X has an external benefit of $5, which means that the social benefit of consumption is higher than the private benefit. In order to achieve efficiency, a subsidy of $5 should be provided to consumers in Market X, which would ensure that the private benefit equals the social benefit.

On the other hand, Market Y has an external cost of $10, which means that the social cost of consumption is higher than the private cost. To achieve efficiency, a tax of $10 should be imposed on consumers in Market Y, which would ensure that the private cost equals the social cost.

Therefore, the best choice is to tax Market Y and subsidize Market X.

In Market X, the External Benefit of Consumption Is $5