Suppose that the production of sunflowers generates a positive externality in that travelers enjoy the scenic beauty of sunflower fields. An appropriate government policy yielding the socially optimum outcome in this case might be:

Question

Quizplus · Accepted Answer

Since the production of sunflowers generates a positive externality, private producers will under-produce relative to the socially optimal level. Therefore, a corrective subsidy would help shift the supply curve to the right, increasing the quantity produced to the socially optimal level. This would result in a market price that reflects the true social value of sunflower production, including the scenic beauty enjoyed by travelers. Other options such as a corrective tax or sunflower-production permits would result in reducing the quantity produced and would further reduce the scenic beauty. Reducing transaction costs would not directly address the underproduction of sunflowers.

Suppose That the Production of Sunflowers Generates a Positive Externality