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A-Level Economics · Positive production externality diagram question

A subsidy shifts MPC down. Through which point must MPC − subsidy pass to deliver the social optimum?

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The diagram

The answer

Point F. MPC − subsidy must cross D exactly at F: a £4-per-unit subsidy (equal to the spillover benefit) lands it there. Reward the spillover: subsidise by the £4 external benefit so MPC − subsidy crosses demand AT the optimum F — the market then chooses Q=7 itself.

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

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