Suppose planting flowering shrubs creates a positive externality equal to $7 per shrub. Further suppose that the local government offers a $7 per-shrub subsidy to planters. The number of shrubs that are planted is then
A)less than the socially optimal quantity.
B)greater than the socially optimal quantity.
C)equal to the socially optimal quantity.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The positive externality created by planting flowering shrubs creates a benefit to society that is not reflected in the private benefits received by the planter. The $7 per-shrub subsidy offered by the local government effectively internalizes this positive externality by equalizing the private and social benefits of planting a shrub. Therefore, with the subsidy, the private marginal benefit of planting a shrub will be equal to the private marginal cost, which is also equal to the social marginal benefit since the positive externality is accounted for. This means that the market outcome will be socially efficient, and the number of shrubs planted will be equal to the socially optimal quantity.

Suppose Planting Flowering Shrubs Creates a Positive Externality Equal to $7