If the production of a product or service involves external beneﬁts, then the government can improve eﬃciency in the market by
A) providing a subsidy to correct for an overallocation of resources.
B) providing a subsidy to correct for an underallocation of resources.
C) imposing a corrective tax to correct for an overallocation of resources.
D) imposing a corrective tax to correct for an underallocation of resources.

Question

Quizplus · Accepted Answer

When a product or service has external benefits (positive externalities), it means that its production or consumption benefits third parties who are not directly involved in the transaction. This often leads to underproduction or underconsumption from a societal perspective because the market does not account for these external benefits. To correct this market failure and move towards a more efficient allocation of resources, the government can provide a subsidy to the producers or consumers of the product. This subsidy effectively lowers the cost of production or consumption, encouraging more of it, which helps to internalize the external benefits and align private costs with social costs.

If the Production of a Product or Service Involves External