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Determining the Optimal Corrective Subsidy
When an activity, such as beekeeping which helps pollinate neighboring farms, provides benefits to individuals other than the person directly involved, a market may produce less of it than is ideal for society. If a government decides to provide a payment to encourage this activity, what economic principle should guide the determination of the payment's size to achieve the most efficient outcome? Explain your reasoning.
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Economics
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
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Comprehension in Revised Bloom's Taxonomy
Cognitive Psychology
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A company develops a new type of drought-resistant crop. When local farms plant this crop, its unique root system improves soil quality and water retention, which benefits neighboring farms that did not purchase the new crop. However, because the company cannot charge the neighboring farms for this benefit, it produces less of the crop than would be ideal for the entire region. Which of the following government actions would most effectively encourage the production of this crop to a more socially beneficial level?
Correcting for Positive Externalities in Agriculture
Determining the Optimal Corrective Subsidy
Evaluating Government Intervention for R&D Spillovers
A government provides a subsidy to a firm producing a good that generates positive external benefits. The subsidy is considered economically optimal only if it is large enough to cause the firm to maximize its total output of the good.
Match each economic term with the description of the market situation it is designed to address or define.
To encourage an activity that generates a positive external benefit for society, a government can offer a payment to the producer or consumer. This payment, intended to increase the quantity of the good to the socially optimal level, is known as a(n) ____.
A market for a good that generates positive external benefits is producing at a quantity below the socially optimal level. A government intervenes to correct this market failure. Arrange the following events in the logical sequence that describes the market's adjustment to the intervention.
Consider a market for a good that generates a positive external benefit. The market equilibrium without intervention occurs at a price of P1 and quantity of Q1. The socially optimal outcome is at a quantity of Q2. At this optimal quantity (Q2), the price consumers are willing to pay for that last unit is P2, while the marginal social benefit is P3. The marginal cost of producing the Q2th unit is also P2. To encourage the market to produce at the socially optimal quantity, what should be the value of the per-unit government subsidy?
Evaluating a Subsidy for Beekeepers