When a positive externality is present in a market,total surplus is:
A) higher when buyers receive a Pigouvian subsidy for the externality.
B) lower when buyers receive a Pigouvian subsidy for the externality.
C) higher when buyers only consider private benefits.
D) Any of these statements could be true.

Question

Quizplus · Accepted Answer

A Pigouvian subsidy is a subsidy given to offset the negative effects of a negative externality. However, in this case, we have a positive externality, which means that a Pigouvian subsidy could be given to buyers to encourage production or consumption of the good that generates the positive externality. By reducing the price of the good to buyers, the subsidy increases the demand for the good and increases the social benefit. Therefore, total surplus is higher when buyers receive a Pigouvian subsidy for the externality.

When a Positive Externality Is Present in a Market,total Surplus