This lesson discusses positive externalities. Positive externalities are seen when an individual or firm making a decision does not receive the full benefit of the decision. When a positive externality exists in an unregulated market, the marginal benefit of the individual making the decision is less than the marginal benefit to society. This results in inefficiencies and welfare loss, and the welfare can be gained by increasing the quantity of consumption. A subsidy is one way to increase the quantity consumed to the socially optimal level.
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