A positive externality exists and government wants to impose a subsidy in order to bring about an efficient outcome.To accomplish its objective,government must set the subsidy equal to marginal

Question

Quizplus · Accepted Answer

A positive externality means that there are external benefits experienced by third parties beyond the private benefits of the producer or consumer. In order to internalize these external benefits and bring about an efficient outcome, the government can impose a subsidy equal to the external benefit. This subsidy will encourage more production or consumption of the good, leading to a larger level of output than would occur in the absence of the subsidy, and also generating a positive externality for society as a whole.

A Positive Externality Exists and Government Wants to Impose a Subsidy