Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the government offers a $6-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
A)They are equal.
B)The equilibrium quantity is greater than the socially optimal quantity.
C)The equilibrium quantity is less than the socially optimal quantity.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The $6-per-shot subsidy to producers will increase the supply of flu shots, resulting in a lower equilibrium price and higher equilibrium quantity. However, since flu shots also create a positive externality of $8 per shot, the socially optimal quantity is higher than the market equilibrium quantity. Therefore, the equilibrium quantity is less than the socially optimal quantity.

Suppose That Flu Shots Create a Positive Externality Equal to $8