Question

If the consumption of a product or service involves external benefits, then the government can improve efficiency in the market by Multiple Choice a. providing a subsidy to correct for an overallocation of resources. b. providing a subsidy to correct for an underallocation of resources. c. imposing a corrective tax to correct for an overallocation of resources. d. imposing a corrective tax to correct for an underallocation of resources.

Answer 1

Answer:

b. providing a subsidy to correct for an underallocation of resources.

Explanation:

When the external benefit of an activity exceeds cost, the activity generates postive externality.

Activities that generate positive externality are usually under produced usually because of the high cost of production . Government can encourage production of activities that generate positive externality by giving subsidy which reduces the cost of production and increases production.

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