If the government's provision of a subsidy is too large to counteract the entire effect of a positive externality,the:
A)quantity consumed will become too high.
B)quantity consumed will become even lower.
C)total surplus will be maximized.
D)None of these statements is true.

Question

Quizplus · Accepted Answer

If the subsidy provided by the government is too large, it will make the good relatively less expensive, leading to an increase in the quantity demanded. As a result, the quantity consumed will become too high, even higher than the socially optimal level. This would mean that the positive externality is not fully internalized, and the market outcome would not be efficient.

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