Question

If the government wants to increase production of a good to achieve marginal social benefit, then the following policy will most likely be implemented
a. a subsidy so that the firm can operate where marginal social benefit equals marginal social cost.
b. a tax so that the firm can operate where marginal private costs equal marginal revenue.
c. a subsidy so that the firm can operate where marginal private costs equal marginal revenue.
d. a tax so that the firm can operate where marginal social benefit equals marginal social cost.
e. None of the above.
f. It will establish a government owned operation.

Answer 1

Answer:

a. a subsidy so that the firm can operate where marginal social benefit equals marginal social cost.

Explanation:

The private company is producing when the marginal revenue matches the marginal cost. The governemtn will want to decrease the cost (that's by subsidize the activity) to match the marginal revenue considering the positive externalities.

The government will do a pigouvian subsidy.

The government reasons to go for this is that the good or services provide positive externalities Which are enjoy by people who doens't purchase the good. Thus, this subsidy will increase the amount of ooutput thus, generating a better social benefit.