ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Place a per-unit tax on the good
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Place a per-unit subsidy on the good
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Place a lump-sum subsidy on the good
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Place a lump-sum tax on the good
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Detailed explanation-1: -A positive externality occurs when a benefit spills over. So, externalities occur when some of the costs or benefits of a transaction fall on someone other than the producer or the consumer. Imagine there’s a factory in your town that produces widgets, a good that benefits consumers all over the world.
Detailed explanation-2: -When a positive externality is present, the market produces less than the socially optimal quantity of the good or service, since there is a benefit to society that is not captured by the individual.
Detailed explanation-3: -When Pigouvian subsidy is imposed on a market with a positive externality, total surplus: increases more than the increase in consumer surplus. When positive externalities exist in a market, if a Pigouvian subsidy is imposed: those who interact in the market will gain surplus.
Detailed explanation-4: -A tax can correct for a negative externality and a subsidy to producers can correct for a positive externality because the tax shifts the cost onto the firms, producing the product and decreasing output, and the subsidy increases the supply and increases output.