University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. Suppose that the federal government gives grants to these researchers equal to the their per-unit production externality. What is the relationship between the equilibrium quantity of university research and the socially optimal quantity of university research produced?
A)The equilibrium quantity is greater than the socially optimal quantity.
B)They are equal.
C)The equilibrium quantity is less than the socially optimal quantity.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The grants internalize the externality, aligning private incentives with social benefits, thus making the equilibrium quantity equal to the socially optimal quantity.

University Researchers Create a Positive Externality Because What They Discover