Final answer:
Economic theory suggests that activities creating both external and private benefits, such as research and technology, should be subsidized to ensure that firms invest optimally by also considering the positive externalities that benefit society. Option C is correct.
Step-by-step explanation:
If an activity creates external benefits as well as private benefits, economic theory suggests that the activity ought to be subsidized. This is because private firms may underinvest in activities like research and technology due to the fact that they cannot capture all the economic benefits of their investment. The social benefits of such innovations often include positive externalities that spill over to third parties and the society at large, which the private firm does not fully receive.
Recognizing the full range of benefits, public policy can encourage optimal investment by providing subsidies, which help the party creating the positive externality receive a greater share of the social benefits. For example, subsidies for flu shots incentivize vaccinations, addressing the positive externalities associated with widespread immunization.