In the case of a positive externality,in order to achieve efficiency the government must set the _________________ equal to the marginal ____________________.

Question

Quizplus · Accepted Answer

A positive externality means that there are external benefits associated with the consumption or production of a good. A subsidy will shift the supply or demand curve to the right, leading to an increase in production or consumption. To achieve efficiency, the government must set the subsidy equal to the marginal external benefit (MEB), which is the additional benefit that accrues to society from the production or consumption of one more unit of the good. By doing so, the marginal social cost (MSC) will align with the marginal social benefit (MSB), leading to an efficient equilibrium.

In the Case of a Positive Externality,in Order to Achieve