If the government's provision of a subsidy is too large to counteract the entire effect of a positive externality, what result can we expect?
A)The quantity consumed will become even lower.
B)The quantity consumed will become too high.
C)Total surplus will be maximized.
D)None of these are true.

Question

Quizplus · Accepted Answer

When a government subsidy is too large for a positive externality, it can lead to overconsumption, meaning the quantity consumed becomes too high. This is because the subsidy lowers the effective price for consumers more than necessary to account for the externality, encouraging consumption beyond the socially optimal level.

If the Government's Provision of a Subsidy Is Too Large