When positive externalities exist, the government must _________ the production of the good generating the externalities in order to achieve ___________.
A) allow the market to dictate; a socially optimal allocation of resources
B) tax; a socially optimal allocation of resources
C) subsidize; a socially optimal allocation of resources
D) subsidize; market equilibrium
E) tax; market equilibrium

Question

Quizplus · Accepted Answer

When positive externalities exist, the social value of a good exceeds the private value, leading to underproduction in a free market. Subsidizing the production can help achieve a socially optimal allocation of resources by encouraging more production to match the social value.

When Positive Externalities Exist, the Government Must _________ the Production