Final answer:
The distribution of surplus from a subsidy in a market with a positive externality is influenced by how demand and supply coordinate social costs and benefits. Market failure occurs when the supply curve does not account for all social costs, and subsidies can correct this by aligning private incentives with social benefits.
Step-by-step explanation:
The distribution of surplus received from a subsidy offered in a market where a positive externality is present depends on the interaction of demand and supply which ideally coordinates social costs and benefits. In the presence of externalities like pollution, the supply curve fails to represent all social costs, leading to market failure. To remedy this, policies such as subsidies are implemented to align private incentives with social benefits. A prime example of this is providing a subsidy for vaccines which carry a positive externality. By subsidizing the flu shot, the government aims to increase vaccinations to the socially optimal quantity, QSocial, by covering the difference between the marginal social benefit and the marginal private benefit.