Question

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the researchers costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimum quantity of university research produced?
A) tax universty researchers
B) offer grants to university researchers
C) eliminate subsidized student loans
D) nothing

Answer 1

Answer:

B) offer grants to university researchers

Explanation:

Positive externality is when the benefits of economic activities to third parties exceeds its costs.

Research and development activities usually generate positive externality because discoveries and inventions are made which benefits the whole society.

Also, education generates positive externality .

Government can encourage activities that generates positive externality by giving grants and subsidies.

Giving grants and subsidies reduces the cost of activities.

Taxes increases the cost of production and this can discourage production.

It is activities that generate negative externality that are usually taxed.

Negative externality is when the benefits of economic activities to third parties is less than the cost.