In the presence of an external benefit, a Pigouvian ______ that is set equal to the ______ the market output to its efficient level.
A) subsidy; external benefit can increase
B) tax; external benefit can increase
C) subsidy; private cost can increase
D) subsidy; external benefit can decrease

Question

Quizplus · Accepted Answer

A Pigouvian subsidy is used to correct for market failure caused by externalities, such as external benefits. By providing a subsidy equal to the value of the external benefit, producers are incentivized to increase their output to its efficient level, which is socially optimal. Therefore, choice A is correct. A Pigouvian tax, on the other hand, would reduce output and consumption and is used to correct for negative externalities. The other choices, C and D, are incorrect as they do not address the external benefit and do not align with the principles of Pigouvian subsidy correction.

In the Presence of an External Benefit, a Pigouvian ______