Suppose that solar-powered car technology advances to the point that solar-power

Question

Suppose that solar-powered car technology advances to the point that solar-powered cars become affordable for the average consumer. Due to the cost saving advantage compared to internal combustion vehicles, consumers begin to purchase more solar-powered vehicles in place of traditional gas-powered cars. What type of externality is likely to result from a consumer's decision to purchase a solar-powered vehicle, and how does it arise? Negative, because companies that do not produce solar-powered cars will be put out of business. Positive, because solar-powered vehicles will result in less environmental pollution, Negative, because including new technology in the cars will drive up the market price. Positive, because individuals can use money they saved on gasoline to help the local community. 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. Institute a price floor above the observed average price for a solar-powered car. The purchase of monopoly rights so the government can exclusively produce solar-powered vehicles. A new tax levied on the makers of solar-powered cars.

Explanation / Answer

1. (b) Positive, because solar-powered vehicles will result in less environmental pollution.

2. (a) A subsidy to consumers who choose to purchase solar-powered vehicles.

It increases the purchase of solar-powered vehicles in the market and helps to achieve socially optimal quantity.

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