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How can the government correct a positive externality?

Posted on April 18, 2014 at 9:40 AM

Positive externalities exist when the marginal social benefits (MSB) exceed the marginal social costs (MSC). Society is getting too little of the good at too low of a price.

The government can correct a positive externality by offering buyers per-unit subsidies (or incentives) to increase demand so that the MSB=MSC. Another policy option is to offer sellers per-unit subsidies to encourage more production so the MSB=MSC. These policy actions will get rid of the deadweight loss in the market.

AP Microeconomics Unit 4 Role of Government

Categories: AP Microeconomics, Micro Unit 4 Role of Government

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