When positive externalities exist in a market,if a Pigouvian subsidy is imposed:
A) those who interact in the market will lose surplus.
B) those who interact in the market will gain surplus.
C) those who do not interact in the market, but are affected by the externality, will gain surplus.
D) None of these statements is necessarily true.

Question

Quizplus · Accepted Answer

A Pigouvian subsidy is a subsidy given to producers in order to encourage them to produce more of a good that creates positive externalities. Since a subsidy decreases the cost of producing the good, producers will increase output and prices will fall. This results in an increase in consumption and welfare, leading to a net gain in surplus for those who interact in the market. Therefore, choice B is the correct answer.

When Positive Externalities Exist in a Market,if a Pigouvian Subsidy