A rain barrel is a container that captures and stores rainwater for landscape and garden use during dry periods. Rain barrels provide an external benefit to the community through water conservation. If the government offers a per unit subsidy on rain barrels equal to the per-unit externality, then
A)the after-subsidy equilibrium quantity of rain barrels will be less than the socially optimal quantity of rain barrels.
B)the after-subsidy equilibrium quantity of rain barrels will be more than the socially optimal quantity of rain barrels.
C)the after-subsidy equilibrium quantity of rain barrels will equal the socially optimal quantity of rain barrels.
D)market incentives will be distorted and move the allocation of resources away from the social optimum.

Question

​A rain barrel is a container that captures and stores rainwater for landscape and garden use during dry periods. Rain barrels provide an external benefit to the community through water conservation. If the government offers a per unit subsidy on rain barrels equal to the per-unit externality, then
A)​the after-subsidy equilibrium quantity of rain barrels will be less than the socially optimal quantity of rain barrels.
B)​the after-subsidy equilibrium quantity of rain barrels will be more than the socially optimal quantity of rain barrels.
C)​the after-subsidy equilibrium quantity of rain barrels will equal the socially optimal quantity of rain barrels.
D)​market incentives will be distorted and move the allocation of resources away from the social optimum.

Quizplus · Accepted Answer

The per unit subsidy offered by the government equal to the per-unit externality will shift the supply curve to the right, leading to an increase in the quantity of rain barrels sold in the market. As a result, the after-subsidy equilibrium quantity of rain barrels will increase and reach the socially optimal quantity of rain barrels, where the marginal social benefit equals the marginal social cost. Therefore, the subsidy will lead to an efficient outcome without any market distortions.

​A Rain Barrel Is a Container That Captures and Stores

A Rain Barrel Is a Container That Captures and Stores