A Pigouvian subsidy should be set equal to the amount of the external benefit.

Question

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A Pigouvian subsidy is a subsidy given by the government to promote activities that generate positive externalities, which are benefits that accrue to society as a whole as a result of an activity that is undertaken by an individual or group. The subsidy should be equal to the amount of the external benefit generated by the activity, so that the private cost of the activity is reduced to the socially optimal level.

A Pigouvian Subsidy Should Be Set Equal to the Amount