Chapter 75, Problem 2MCQ

To determine

An efficient Pigouvian subsidy for a good

Answer to Problem 2MCQ

From the available options, the correct option is marginal external benefit.

Explanation of Solution

A Pigouvian subsidy for a good would be equal to the marginal external benefit that is obtained by consuming or using one extra unit. Whereas, external cost indicates the Pigouvian tax not benefits and subsidy indicates the benefits which means both options of marginal external cost and external cost are not correct. There would be no subsidy or benefit when MSC is equal to MSB. MSB includes both marginal private benefit as well as marginal external benefit.

Therefore, the correct option is d (marginal external benefit).

Economics Concept Introduction

Introduction: The benefits which are obtained by the third party who is not actually buying, selling, or consuming the good are called external benefits such as using a vehicle to travel that reduces the congestion on the road because it provides benefit to other drivers so that they can drive quickly and safely.