Medical research is often presented as an example of a positive externality.Which of the following options available to policymakers would encourage producers of medical knowledge to provide a socially optimal level of production?
(i) imposing price ceilings on selected medical procedures
(ii) placing taxes on the sale of prescription drugs
(iii) providing subsidies to these firms
A)(i), (ii) and (iii)
B)(i) and (ii) only
C)(iii) only
D)none of the above

Question

Quizplus · Accepted Answer

Providing subsidies to firms producing medical knowledge would incentivize them to produce at a socially optimal level. This would encourage the development of new medical procedures and drugs that would benefit society as a whole. However, imposing price ceilings on medical procedures or placing taxes on prescription drugs would not necessarily encourage producers to provide a socially optimal level of production. Price ceilings could limit the amount of revenue that firms receive, which could discourage them from investing in the research and development of new procedures and drugs. Taxes on prescription drugs could increase their price, which could reduce demand for them and also discourage firms from investing in research and development.

Medical Research Is Often Presented as an Example of a Positive