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 (positive spillover effects) in addition to private benefits, it means that the social benefit from the activity is greater than the private benefit. In this case, a subsidy to incentivize the activity would be appropriate as it would increase the private benefit and encourage more of the activity, leading to even greater external benefits. This way, the activity would be aligned to the socially optimal level by increasing the total benefits to society.

If Some Activity Creates External Benefits as Well as Private