If the production of a good generates external benefits,the government could increase efficiency by

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Quizplus · Accepted Answer

If the production of a good generates external benefits, it means that the benefits spill over to society beyond what is captured by the market. In this case, the market equilibrium quantity will be lower than the socially optimal quantity. By subsidizing the production of the good, the government can encourage more production and move closer to the socially optimal quantity, thus increasing efficiency. Taxing the production of the good would discourage production, while regulating or requiring licenses may be too cumbersome and may not address the market failure directly.

If the Production of a Good Generates External Benefits,the Government