Th1.4: Subsidies 2 Flashcards
1
Q
What can the government do in order to solve positive externalities?
A
introduce subsidies
2
Q
What will an introduction of subsidies do?
A
fix information gaps and shift the supply curve to the right as it will lower the cost of production
3
Q
Refer to PP
Look at Graph 21. Where would the free market produce?
A
MPC = MPB at Q1P1
4
Q
Refer to PP
Look at Graph 21. Where is the social optimum?
A
MSC = MSB
P2Q2
5
Q
What does the introduction of the subsidy mean?
A
that the equilibrium point is Q2P3, at the social optimum output - market produces at output that best allocates resources
