Question

Given in the table are the marginal private cost and the marginal social cost of the production of chemical fertilizer and the marginal social benefit from the consumption of fertilizer. If the government decides to correct the externality problem, it could

output benefit cost cost
0 80 0 20
1 70 10 30
2 60 20 40
3 50 30 50
4 40 40 60
5 30 50 60
6 20 60 80
A) subsidize production by $20 per unit.
B) subsidize production by $10 per unit.
C) provide the good itself.
D) tax production by $10 per unit.
E) tax production by $20 per unit."

Answer 1

The question deals with correcting an externality in car production by a government subsidy that aligns the marginal private cost with the marginal social cost to achieve a socially optimum level of production.

Step-by-step explanation:

The question refers to the concept of externalities and market failure in economics. Specifically, it pertains to the situation where the marginal private costs (MPC) of producing a good, such as fuel-efficient cars, are higher than the marginal social costs (MSC). The marginal social benefit (MSB) is assumed to be same as the private benefit. To address this externality and achieve the socially optimal level of production, Q_social, one policy intervention the government can consider is providing a subsidy to bridge the gap between MPC and MSC. This subsidy effectively lowers the cost of production, thus encouraging the production of more fuel-efficient cars, aligning the private equilibrium with the social optimum.