Question

In which of the following situations can an externality be internalized by using the Pigouvian​ subsidy? ​(Check all that​ apply.)

A. John likes to play loud music in the middle of the night which disturbs his​ roommate's sleep. B. An orchard is placed next to a beehive.​ So, both the farmer and the beekeeper benefit from each other. C. The pollution caused by a firm has adverse health consequences for nearby residences. D. ​Sophia's flower garden provides a pleasant view for her neighbors.

By introducing Pigouvian​ subsidies, the government can BLANK the equilibrium quantity towards the socially optimal level.

It is given that the marginal social benefit​ (MSB) of a particular positive externality equals​ $500. Which of the following statements is true if this externality is to be​ internalized? A. The Pigouvian subsidy equals​ $500 and the difference between the supply curve and the MSB curve equals​ $500. B. The Pigouvian subsidy is greater than​ $500 and the difference between the supply curve and the MSB curve is less than​ $500. C. The Pigouvian subsidy is less than​ $500 and the difference between the demand curve and the MSB curve is greater than​ $500. D. The Pigouvian subsidy equals​ $500 and the difference between the demand curve and the MSB curve equals​ $500.

The Pigouvian subsidy creates a BLANK that is identical to the MSB curve by having individuals consider the externality when making their choices.

Which of the following is common between corrective taxes and corrective​ subsidies? ​(Check all that​ apply.) A. It equals the marginal external cost. B. It results in market failure. C. It provides a greater incentive to deal with the externality problem rather than the​ command-and-control approach. D. It exactly aligns private and​ society's incentives.

Answer 1

(1) (B) and (D)

A Pigouvian subsidy is imposed when there is a positive externality. Only in cases (B) and (D) a positive externality exists.

(2) By introducing Pigouvian​ subsidies, the government can increase the equilibrium quantity towards the socially optimal level.

(Because, without government intervention with positive externality, market equilibrium quantity is less than socially optimal quantity).

(3) (D)

Optimal Pigouvian subsidy per unit = MSB - Private demand

(4) The Pigouvian subsidy creates a Social welfare gain** that is identical to the MSB curve by having individuals consider the externality when making their choices.

**Since drop-down options are not provided, exact wording may differ

(5) Options (C) and (D) are correct.