If the production of a good generates a positive externality, the government can increase allocative efficiency by ataxing the producer of the good bsubsidizing the producer of the good cprosecuting firms that produce the good without proper permits dsetting a price ceiling to encourage production of the good
Question
If the production of a good generates a positive externality, the government can increase allocative efficiency by ataxing the producer of the good bsubsidizing the producer of the good cprosecuting firms that produce the good without proper permits dsetting a price ceiling to encourage production of the good
Solution
The correct answer is b) subsidizing the producer of the good.
Here's why:
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A positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. In this case, the production of a good is providing benefits to parties not directly involved in the buying or selling of the good.
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When a positive externality exists, the social benefit of the good's production is greater than the private benefit. However, without government intervention, producers only consider their private costs and benefits, not the benefits to others. This leads to a lower level of production than what would be socially optimal.
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By subsidizing the producer, the government can help align the private benefits with the social benefits. The subsidy effectively lowers the cost of production for the producer, encouraging them to produce more of the good. This increase in production moves the market closer to the socially optimal level of production, increasing allocative efficiency.
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The other options (taxing the producer, prosecuting firms without proper permits, setting a price ceiling) do not directly address the issue of the positive externality and therefore would not necessarily increase allocative efficiency.
Similar Questions
Which of the following is true when the production of a good results in negative externalities? aThe government must produce the good. bThe private market will produce too little of the good. cThe private market price will be too low. dThe government must prevent the production of the good.
When a positive externality exists, the socially optimal level of output will be than that resulting from a private market.
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If the social benefit of consuming a good or a service exceeds the private benefit,Group of answer choicesthe market achieves economic efficiency.a negative externality exists.a positive externality exists.the sum of consumer surplus and producer surplus is maximised.
What can you say about the allocatively efficient level of output compared to the new equilibrium market quantity after the tax (that is the same size as the external cost per unit of output) on producers described above is imposed?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aThey are the same.bThe equilibrium market quantity is greater.cThe allocatively efficient quantity is greater.dYou cannot tell from the information given.
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