Final answer:
Subsidies are financial supports from the government to promote activities with beneficial outcomes, often addressing positive externalities such as education or public health. They help align the social benefits with private benefits, which can influence market equilibrium and address market failure.
Step-by-step explanation:
What Are Subsidies and Positive Externalities?
Subsidies are financial support provided by governments to entities like businesses, organizations, or individuals. They are meant to encourage activities that may have beneficial outcomes for society, that otherwise may not be pursued due to not being profitable on their own. Subsidies often relate to positive externalities, which are benefits experienced by third parties as a result of an economic transaction they are not directly involved in.
Examples of Positive and Negative Externalities
Positive externalities include improved public health due to vaccinations or society benefiting from a well-educated populace. An example of negative externalities might be pollution from a factory that affects the health of nearby residents.
Equilibrium Price and Quantity
The equilibrium price and quantity in a market occur where the supply and demand curves intersect. Without subsidies, markets may not produce the socially optimal level of goods that generate positive externalities.
Firms Contributing to Market Failure
Firms can contribute to market failure by not considering the full social costs of their actions, which may lead to negative externalities that harm society. Command-and-control regulation is a traditional approach to addressing such market failures.