FIGURE 10-4 Why a Market Economy Preserves Too Little Farmland
imageWithout government intervention, the quantity of preserved farmland will be zero, the level at which the marginal social cost of preservation is zero. This is an inefficiently low quantity of preserved farmland: the marginal social benefit is $20,000, but the marginal social cost is zero. An optimal Pigouvian subsidy of $10,000, the value of the marginal social benefit of preservation when it equals the marginal social cost, can move the market to the socially optimal level of preservation, QOPT.