Boosting Merit Good Consumption via Price Ceilings and Subsidies

Steps:

• Merit goods are underconsumed due to positive externalities; government aims to increase quantity demanded and supplied.
• An effective maximum price (ceiling) below equilibrium lowers consumer price, boosting demand.
• A producer subsidy shifts supply curve right, offsetting potential shortages from the ceiling and increasing output.
• Combine to achieve higher equilibrium quantity without excess costs.

Why A is correct:

• Maximum price makes the merit good affordable, increasing consumption; subsidy encourages production to match demand, aligning with policy to correct underconsumption from externalities.

Why the others are wrong:

• B: Minimum price raises consumer price, reducing demand despite subsidy boosting supply.
• C: Minimum price and tax both raise effective price and reduce supply, decreasing consumption.
• D: Maximum price aids affordability, but tax reduces supply, worsening shortages and limiting quantity increase.

Final answer: A