Suppose planting flowering shrubs creates a positive externality equal to $7 per shrub. Further suppose that the local government offers a $7 per-shrub subsidy to planters. The number of shrubs that are planted is then
A. less than the socially optimal quantity.
B. greater than the socially optimal quantity.
C. equal to the socially optimal quantity.
D. There is not enough information to answer the question.
To answer this question, we need to understand the concept of positive externality and how subsidies impact the quantity of shrubs planted.
A positive externality occurs when the action of an individual or entity creates a beneficial impact on others who are not directly involved. In this case, planting flowering shrubs creates a positive externality worth $7 per shrub, meaning that each shrub planted provides an additional $7 of benefit to society.
Subsidies, on the other hand, are financial incentives provided by the government to encourage certain activities. A $7 per-shrub subsidy means that for every shrub planted, the planter receives $7 from the government, effectively reducing their cost of planting.
Now, let's consider the impact of the subsidy on the quantity of shrubs that are planted. The subsidy lowers the cost of planting for individuals, making it more financially attractive for them to engage in this activity. As a result, the subsidy increases the incentive to plant shrubs.
Given that the positive externality of $7 per shrub provides an additional benefit to society, the socially optimal quantity of shrubs would be the quantity at which the marginal social benefit (the benefit to society) equals the marginal private cost (the cost to the planter). In this case, since the subsidy reduces the private cost to plant shrubs, it shifts the marginal private cost curve downward.
However, without knowing the specific marginal private cost curve and the marginal social benefit curve, it is impossible to determine the exact quantity of shrubs planted. Therefore, the correct answer to the question is option D: There is not enough information to answer the question.
To accurately determine the socially optimal quantity of shrubs planted, further information about the specific curves and the relationship between the positive externality and the subsidy would be needed.