Economics · Public Economics
Given below are two statements: Assertion (A): Subsidies are NOT an effective long-run policy instrument for internalising positive externalities under competitive output markets, because in the long run, the subsidy attracts new firms (entry), the industry expands, and the market price eventually returns to the original level, eliminating the intended effect on output and welfare. Reason (R): In competitive markets in the long run, economic profits are driven to zero by free entry and exit. A subsidy increases short-run profits, attracting entry until profits return to zero at a higher quantity but no subsidy effect on price persists if the supply curve is horizontal in the long run. Choose the most appropriate answer:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1(A) is false, but (R) is true
- 2(A) is true, but (R) is false
- 3Both (A) and (R) are true, but (R) is NOT the correct explanation of (A)
- 4Both (A) and (R) are true, and (R) is the correct explanation of (A)✓
Correct answer
Both (A) and (R) are true, and (R) is the correct explanation of (A)
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