Question

Assume that the marginal private costs of a firm producing fuel-efficient cars is greater than the marginal social costs. Assume that the marginal private benefits of a firm producing fuel-efficient cars is the same as the marginal social benefits. Discuss one way that the government can try to increase production and sales of fuel-efficient cars to the socially desirable amount.; Hint; : the government is trying to affect production through costs, not benefits.

a) Provide subsidies to consumers who purchase fuel-efficient cars.
b) Impose a tax on firms producing fuel-efficient cars.
c) Implement stricter emission standards on fuel-efficient cars.
d) Reduce research and development funding for fuel-efficient car technologies.

Answer 1

To align the production of fuel-efficient cars with the socially optimal level, the government can provide subsidies to firms, thereby reducing the firms' costs and encouraging increased output.

Step-by-step explanation:

Assuming that the marginal private costs (MPC) of a firm producing fuel-efficient cars is greater than the marginal social costs (MSC), and the marginal private benefits equal the marginal social benefits, one effective way for the government to increase production and sales to the socially desirable level is to provide a subsidy to firms. This subsidy would decrease the MPC to be in line with the MSC, incentivizing firms to produce more fuel-efficient cars, thus aligning the market equilibrium with the socially optimal output level.

By providing subsidies directly to producers, the government lowers the production costs for these firms, effectively encouraging them to increase their output. This increase in production leads to a greater availability of fuel-efficient cars in the market, making it possible to reach the quantity that society deems as most beneficial, denoted as Qsocial.