If a per-unit subsidy is applied to a good with a positive externality in consumption, the effect on the price paid by consumers is:

• A. The price paid by consumers increases
• B. The price paid by consumers decreases
• C. The price paid by consumers remains the same
• D. The price paid by consumers becomes unpredictable

Answer: (B)

When a good has a positive externality in consumption, increasing its consumption yields additional social benefits beyond what the buyer pays. A per-unit subsidy on that good lowers the buyer’s out-of-pocket cost for each unit. If the subsidy is passed through to consumers, the price they effectively pay is the market price minus the subsidy, so the price paid by consumers decreases. This reduction in the consumer price encourages more purchases, moving consumption closer to the social optimum. The other options don’t align with how a subsidy affects consumer costs: a higher price contradicts the subsidy effect, and a unchanged or unpredictable price ignores the downward pressure the subsidy creates on out-of-pocket costs.