Question

Products with positive externalities are underconsumed, thus creating a market failure. How can the government correct this failure? I. By taxing the output of the product to increase tax revenue II. By paying subsidies to the producers, to lower the cost of the product to potential buyers III. By reducing the marginal social benefit of the product, thus eliminating the externality IV. By requiring producers to manufacture more of the product V. By producing it themselves and distributing it free or at very low cost to consumers

Answer 1

Answer:

The government can correct the failure of consuming products with positive externalitiies by:

• By paying subsidies to the producers, to lower the cost of the product to potential buyers

Explanation:

A positive externality occurs when the production as well as the consumption of a particular product or service generates a social benefit that impacts on a third party not involved in the transaction.

Example of such products and services include, education, Telecommunication, good road, electric power, transportation and logistics services.

Take for instance, if the government pays money to the providers of electric power thereby subsidizing its cost, it will drastically reduce the cost of production and benefit the final consumers who will now purchase goods at cheaper rates.

Similarly, reducing the cost of education for low income earners will increase the participation of school goers among the under privileged and reduce drop out rates. the ripple effect is reduction in crime and increase in skilled labor for the nation's human resource capital pool.