Suppose that candy producers create a positive externality equal to $1 per pound of candy. Further suppose that the government offers a $1-per-pound subsidy to the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of candy?

a. The equilibrium quantity is greater than the socially optimal quantity. b. The equilibrium quantity is less than the socially optimal quantity. c. They are equal. d. There is not enough information to answer the question.

Question

Pierce Lawrence

Business

15 July, 21:33

Suppose that candy producers create a positive externality equal to $1 per pound of candy. Further suppose that the government offers a $1-per-pound subsidy to the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of candy?

a. The equilibrium quantity is greater than the socially optimal quantity. b. The equilibrium quantity is less than the socially optimal quantity. c. They are equal. d. There is not enough information to answer the question.

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Answers (1)

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Rubi Garrett · Answer 1

c. They are equal.

Explanation:

In this case, the positive externality per pound of candy and the subsidy received by producers are both $1. This means that the equilibrium quantity and the socially optimal quantity are equal. The equilibrium quantity occurs when supply equals demand for a product. The socially optimal quantity is obtained when comparing the marginal benefit to the marginal cost.