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A-Level Economics · Positive consumption externality diagram question

A subsidy shifts S down to S − subsidy. Through which point must the NEW curve pass to reach the social optimum?

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The answer

Point C. S − subsidy must cross the PRIVATE demand curve MPB at Q=7 — point C (£3). Consumers act on MPB, so that's where the crossing must land. Consumers decide on MPB, not MSB. To get Q=7 the subsidised supply must cross MPB at point C (£3): price falls, demand extends to the optimum. Crossing at F would leave demand short.

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This is one of 5 questions on the positive consumption externality diagram — every corner lettered, every wrong answer diagnosed.

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