To internalize a positive externality, an appropriate public policy response would be to
A) ban the good creating the externality.
B) tax the good.
C) subsidize the good.
D) have the government produce the good until the value of an additional unit is zero.

Question

Quizplus · Accepted Answer

Subsidizing the good would increase its production and consumption, leading to a higher level of the positive externality. Therefore, the external benefit is internalized and the overall welfare is maximized. Banning or taxing the good would decrease its production and consumption, leading to a lower level of the positive externality, and potentially causing deadweight loss. Having the government produce the good until the value of an additional unit is zero (i.e., achieve allocative efficiency) is not necessary and may not be feasible in practice.

To Internalize a Positive Externality, an Appropriate Public Policy Response