Answer to Question #113053 in Microeconomics for Nina

Question

The market for widgets has demand P = 60 − 2QD and supply P = 2QS . The consumption of widgets produces a positive marginal benefit to society so that the social marginal benefit curve is given by SMB = 60 − Q. The government considers two policies to correct the inefficiency created by the externality in the market: (1) give producers a Pigouvian subsidy, or (2) give producers a subsidy equal to the quantity they produce. Check all of the following statements (if any) that are correct and explain why:
A. The market produces the efficient quantity under each policy
B. The deadweight loss from policy (2) is greater than from policy (1) C. The government spends more on policy (1) than on policy (2)

Answer 1

A. The market produces the efficient quantity under each policy - it's false, because any tax creates deadweight loss.

B. The deadweight loss from policy (2) is greater than from policy (1) - it's true.

C. The government spends more on policy (1) than on policy (2) - it's false, because the government will spend more on policy (2).