A properly-set Pigouvian subsidy ______ the price so that the after-subsidy price sends ______ signal.
A) raises; the correct
B) reduces; the correct
C) raises; an incorrect
D) reduces; an incorrect

Question

Quizplus · Accepted Answer

A Pigouvian subsidy is designed to correct market failure by reducing the cost to society of a particular activity (such as pollution) and encouraging a more socially optimal level of that activity. Therefore, the subsidy should reduce the price, not raise it, so that consumers will be incentivized to choose the socially optimal level of activity. Thus, choice B is correct.

A Properly-Set Pigouvian Subsidy ______ the Price So That the After-Subsidy