For a government subsidy on a good with an external benefit to result in the efficient amount of output being produced,what must be done?
A) The size of marginal external benefit must be accurately determined.
B) The government must produce the product.
C) Private production and private consumption must both be directly subsidized.
D) The quantity demanded must be decreased to the efficient amount.
E) Private production without the subsidy must be prohibited.

Question

Quizplus · Accepted Answer

In order for the subsidy to result in the efficient amount of output, the magnitude of the external benefit must be accurately determined so that the subsidy can be set at the appropriate level to incentivize production to the socially optimal level. Otherwise, the subsidy could be too large or too small, leading to either an overproduction or underproduction of the good. The other choices are not necessary for achieving efficiency or may even be counterproductive.

For a Government Subsidy on a Good with an External