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A per-unit subsidy can correct a positive externality Consumption of a good creates a positive externality....

A per-unit subsidy can correct a positive externality

Consumption of a good creates a positive externality. Marginal costs are 0.5q + 60, marginal benefits are 110 – 1.5q and marginal social benefits are 110 – 0.5q. Provide a diagram showing the cooperative solution and the private solution. Illustrate and quantify how a per-unit subsidy can be used to correct this externality. Shade in the area representing the total cost to the government providing this subsidy. The subsidy required to correct this externality is equal to ________ dollars per unit.

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Answer #1

Graph

With subsidy = 50

New PMC = .5q + 60-50

= .5q + 10

So new PMC cuts PMB at Qs*= 50

So effecient solution is achieved in market

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