Suppose that candy producers create a positive externality equal to $1 per pound of candy. Further suppose that the government offers a $1-per-pound subsidy to the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of candy?
A)The equilibrium quantity is greater than the socially optimal quantity.
B)The equilibrium quantity is less than the socially optimal quantity.
C)They are equal.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The $1-per-pound subsidy to producers offsets the positive externality, aligning the private cost with the social cost. This means the market will produce the socially optimal quantity of candy, making the equilibrium quantity equal to the socially optimal quantity.

Suppose That Candy Producers Create a Positive Externality Equal to $1