Subsidizing consumers of education to reach the socially optimal quantity is an example of addressing which type of externality?

• A. Positive externality
• B. Negative externality
• C. Public good
• D. Market failure

Answer: (A)

Subsidizing consumers of education targets a positive externality. When people choose how much schooling to get, they weigh only their private costs and private benefits. Society, however, gains additional benefits from education—higher productivity, lower crime, better civic participation, and other spillovers that nobody paid for in the market. Because these social benefits aren’t reflected in the price, the market tends to underconsume education relative to its true social value. Providing a subsidy lowers the private cost to students, encouraging more education and moving the quantity closer to the socially optimal level. Public goods and market failure are broader concepts, but the specific external effect here is a positive externality created by education.