Which two methods can promote a positive externality?

Which two methods can promote a positive externality?

• A. Taxes and regulation
• B. Subsidies and direct provision
• C. Price controls and quotas
• D. Import tariffs and subsidies

Answer: (B)

Positive externalities occur when the social benefit from a good or activity is greater than the private benefit, so the market will underproduce or underconsume it. To encourage more of these beneficial effects, the government can intervene by subsidizing activities that generate external benefits, which lowers private costs or increases private benefits and boosts output. Direct provision is another method: the government itself supplies the good or service to guarantee its availability and uptake, especially when users can’t pay or when private firms underprovide. Examples include subsidies for education or vaccination programs, and government provision of public goods like vaccination clinics or libraries. In contrast, taxes and regulation are used to curb activities that impose costs on others (negative externalities) rather than to promote positive ones. Price controls and quotas can distort markets and don’t target the external benefit directly. Import tariffs may protect domestic producers but don’t specifically promote positive externalities, whereas subsidies paired with direct provision directly encourage the beneficial effect. Therefore, subsidies and direct provision best promote positive externalities.

Positive externalities occur when the social benefit from a good or activity is greater than the private benefit, so the market will underproduce or underconsume it. To encourage more of these beneficial effects, the government can intervene by subsidizing activities that generate external benefits, which lowers private costs or increases private benefits and boosts output. Direct provision is another method: the government itself supplies the good or service to guarantee its availability and uptake, especially when users can’t pay or when private firms underprovide. Examples include subsidies for education or vaccination programs, and government provision of public goods like vaccination clinics or libraries.

In contrast, taxes and regulation are used to curb activities that impose costs on others (negative externalities) rather than to promote positive ones. Price controls and quotas can distort markets and don’t target the external benefit directly. Import tariffs may protect domestic producers but don’t specifically promote positive externalities, whereas subsidies paired with direct provision directly encourage the beneficial effect.

Therefore, subsidies and direct provision best promote positive externalities.