Table 10-2
The following table shows the private value, private cost, and social value for a market with a positive externality.
-Refer to Table 10-2. How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially-optimal level of output?
A)$3
B)$5
C)$7
D)$9

Question

Table 10-2
The following table shows the private value, private cost, and social value for a market with a positive externality. 
-Refer to Table 10-2. How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially-optimal level of output?
A)$3 
B)$5 
C)$7 
D)$9

Quizplus · Accepted Answer

The socially-optimal level of output is where social value equals social cost. In this market, the social value is $15 and the social cost is $8. Thus, the externality is positive and the subsidy needed to move the market to the socially-optimal level would be the difference between the social value and the private value at the equilibrium level of output, which is $15 - $8 = $7. Therefore, the correct choice is C.

Table 10-2 the Following Table Shows the Private Value, Private Cost, and Cost