Suppose that solar-powered car technology advances to the point that solar-powered cars become affordable for the average consumer. Which type of externality is likely to result from a consumer’s decision to purchase a solar-powered vehicle instead of a gas-powered vehicle, and how does it arise? This decision generates a negative externality because companies that do not produce solar-powered cars will be put out of business. positive externality because the replacement of gas-powered vehicles with solar-powered vehicles will result in less environmental pollution. positive externality because individuals can use the money they save on gasoline to help the local community. negative externality because including new technology in the cars will drive up the market price. Suppose the government is interested in moving the market closer to the socially optimal quantity. Which policy would likely result in the desired outcome? a subsidy to consumers who choose to purchase solar-powered vehicles granting one firm monopoly rights to produce solar-powered vehicles a new tax levied on the makers of solar-powered cars a price floor above the observed average price for a solar-powered car
The Correct Answer and Explanation is:
Correct Answer (First Part):
Positive externality because the replacement of gas-powered vehicles with solar-powered vehicles will result in less environmental pollution.
Correct Answer (Second Part):
A subsidy to consumers who choose to purchase solar-powered vehicles.
Explanation:
When consumers choose to buy solar-powered vehicles instead of gas-powered vehicles, a positive externality is created. A positive externality occurs when a decision or action by an individual results in benefits to others that are not reflected in the market price. In this case, the benefit to society is reduced environmental pollution, which includes cleaner air, lower greenhouse gas emissions, and fewer health problems related to air quality.
Although the consumer benefits from using less fuel and paying less for transportation, other people also benefit from the improved environmental conditions without directly participating in the transaction. This social benefit is not captured by the market alone, which means fewer solar-powered vehicles may be purchased than is ideal for society. This situation is known as market underproduction.
To move the market closer to the socially optimal quantity, the government can use a subsidy. A subsidy to consumers lowers the effective price of solar-powered vehicles, encouraging more people to buy them. As more consumers switch to solar-powered cars, the positive environmental impact grows, and society as a whole gains additional benefits.
The other policy options would not support this goal. Granting a monopoly might reduce competition and innovation. A new tax on solar-powered cars would make them less attractive. A price floor would make these cars more expensive, reducing demand. Only the subsidy aligns private incentives with social benefits and helps correct the market imbalance caused by the positive externality.
