14.8 Suppose the government wishes to combat the undesirable allocational effects of a monopoly through the use of a subsidy.

a. Why would a lump-sum subsidy not achieve the government’s goal?

b. Use a graphical proof to show how a per-unit-of-output subsidy might achieve the government’s goal.

c. Suppose the government wants its subsidy to maximize the difference between the total value of the good to consumers and the good’s total cost. Show that, to achieve this goal, the government should set t

P ¼ " 1 eQ, P

, where t is the per-unit subsidy and P is the competitive price. Explain your result intuitively.