Which outcome is most likely after a subsidy is implemented to correct a positive externality in consumption?

• A. The market quantity rises, moving toward the social optimum
• B. The market quantity falls
• C. The price to consumers rises
• D. The externalities disappear completely

Answer: (A)

When a subsidy is given to correct a positive externality in consumption, it effectively raises the private benefit that consumers receive from the good. This shifts the perceived value upward, causing more of the good to be purchased. As a result, the market quantity rises toward the social optimum, where the total benefit to society (marginal social benefit) equals the total cost. Since the subsidy lowers the out-of-pocket price for consumers, the price they pay falls rather than rises. The externality isn’t fully removed—subsidies can improve the outcome but don’t completely eliminate the external benefit. So the most likely result is that quantity increases toward the social optimum.