Question

If the consumption of a good generates positive externalities, then which of the following is correct? The government can subsidize consumption of the good to increase efficiency. Market forces may lead to an underallocation of resources to producing the good. Both of these answers are correct.

Answer 1

Both of these answers are correct.

Step-by-step explanation:

Positive externality is when the benefits of economic activities to third parties exceeds its cost.

Activities that generate positive externality are

1. Education

2. Research and development

To encourage activities that have positive externality, government can subsidise such activities. Subsidies makes the activity cheaper and incentivise people to carry out such activities.

Market forces may lead to an underallocation of resources to producing the good. Therefore, the government might intervene in the allocation of the resources to increase efficiency.

I hope my answer helps you.