Final answer:
A Pigouvian subsidy corrects for market inefficiency in the presence of a positive externality by bridging the gap between the private and social benefits, leading to a socially optimal quantity (QSocial) being produced and consumed. This subsidy makes the private costs and benefits align with the social costs and benefits, improving market outcomes.
Step-by-step explanation:
When a Pigouvian subsidy is imposed on a market with a positive externality, efficiency in that market is improved. This type of government intervention is designed to correct market failure, which occurs when private markets do not achieve efficient output due to the presence of externalities. In the case of a positive externality, such as with flu vaccinations, the market quantity (QMarket) is less than the socially optimal quantity (QSocial) because the market demand curve does not account for the positive spillover benefits to society. As a result, the marginal social benefit exceeds the marginal social cost at the market output.
A Pigouvian subsidy aligns the private benefit with the social benefit, encouraging increased production and consumption to the socially optimal level. For instance, if the government provides a subsidy to consumers or producers of flu shots that is equal to the marginal social benefit minus the marginal private benefit, it can lead to an increase in vaccinations to the socially optimal quantity (QSocial), hence restoring efficiency to the market.