Question

Displayed in the diagram below are conditions in the market for residential Internet access in a U.S. state. The government of this state has determined that access to the Internet improves the learning skills of children, which it has concluded is an external benefit of Internet access. The government has also concluded that if these external benefits were to be taken into account, 3 million residents would have Internet access. Suppose that the state government’s judgments about the benefits of Internet access are correct and that it wishes to offer a per-unit subsidy just sufficient to increase total Internet access to 3 million residences. What per-unit subsidy should it offer? Use the diagram to explain how providing this subsidy would affect conditions in the state’s market for residential Internet access.

Short answer

The per-unit subsidy that the government should offer is $\$20$to the internet service providers.

Step-by-step solution

Step 1. Define External Benefits.

External benefits are positive externalities that are beneficial for the economy.

Step 2. The per-unit subsidy.

The current rate for Internet access is $\$30$and the number of users was 2 million. If the government wants to increase the number of users to 3 million the rate of Internet access has to be brought down to $\$20$at which rate the suppliers could supply only 1 million users with Internet access. Since the effective price for suppliers to reach 3 million is $40 the government would have to provide a subsidy of $\$20$per unit to the providers in order to increase the user base to 3 million at a rate of $\$20$.