Question

To correct for positive externalities, the government should:_________

(A) do nothing, since no harm is done by positive externalities
(B) levy a tax on the output of the good or service
(C) pay a subsidy equal to the marginal external benefit
(D) impose a price ceiling on the good to discourage its production
(E) impose a price floor on the good at which the marginal private benefit equals the marginal social cost

Answer 1

To address positive externalities, the government can provide subsidies that close the gap between the marginal private and social costs, increasing production to the socially optimal level, like with fuel-efficient cars.

Step-by-step explanation:

To correct for positive externalities, the government could pay a subsidy equal to the marginal external benefit. This aligns the marginal private cost with the marginal social cost, encouraging the production of goods with positive externalities, such as fuel-efficient cars, to the socially desirable amount. A practical example of how subsidies work is providing a voucher to citizens for vaccinations, which results in both suppliers and consumers operating at a quantity where the marginal social benefit (MSB) equals the marginal social cost (MSC).

In the case of fuel-efficient cars, if the marginal private cost is greater than the marginal social cost, and the marginal private benefit is the same as the marginal social benefit, the government can subsidize production. This subsidy would make it cheaper to produce such vehicles, narrowing the gap between the private and social costs, and result in an increased market equilibrium quantity of fuel-efficient cars, closer to the socially optimal level, known as Q_social.

Answer 2

e

Step-by-step explanation:

A good has positive externality if the benefits to third parties not involved in production is greater than the cost. an example of an activity that generates positive externality is research and development. Due to the high cost of R & D, they are usually under-produced. Government can encourage the production of activities that generate positive externality by granting subsidies.