A Pigovian subsidy __________.

Question

ensures that external costs are minimized

exists when marginal social benefits exceed marginal social costs

maximizes internal costs

encourages activities that create external benefits

Answer 1

A Pigovian subsidy encourages activities that create external benefits.

Pigovian subsidies are designed to encourage positive externalities, which are benefits that affect third parties who do not directly participate in the economic transaction. By providing a subsidy for activities that generate these external benefits, such as education, vaccination, or renewable energy production, the government aims to align private incentives with social benefits.