If some activity creates external beneﬁts as well as private beneﬁts, then economic theory suggests that the activity ought to be
A) taxed.
B) prohibited.
C) subsidized.
D) left alone.

Question

Quizplus · Accepted Answer

When an activity creates external benefits in addition to private benefits, it means that society at large benefits from the activity, not just the individuals or entities directly involved. Economic theory suggests that such activities should be subsidized to encourage more of the activity to occur, as the market alone may not produce the socially optimal quantity. Subsidies can help align the private incentives with the social benefits.

If Some Activity Creates External Beneﬁts as Well as Private