A per-unit _______________________ would result in the production of the socially optimal quantity.

• A. Tax of $10
• B. Tax of $20
• C. Subsidy of $10
• D. Subsidy of $20

Answer: (D)

Verified step by step guidance

1. Identify the supply and demand curves on the graph. The curve labeled 'S' is the supply curve, and the curve labeled 'PD' is the demand curve.
2. Determine the equilibrium point where the supply and demand curves intersect. This point represents the market equilibrium quantity and price without any intervention.
3. Locate the socially optimal quantity on the graph. This is typically where the social demand curve (SD) intersects the supply curve (S).
4. Analyze the difference between the market equilibrium quantity and the socially optimal quantity. If the socially optimal quantity is greater than the market equilibrium quantity, a subsidy is needed to increase production.
5. Conclude that a per-unit subsidy equal to the vertical distance between the supply curve (S) and the social demand curve (SD) at the socially optimal quantity will result in the production of the socially optimal quantity. In this case, the correct answer is a subsidy of $20.