Which policy is often used to align private consumption with social benefits when there is a positive externality?

• A. A per-unit tax on the good
• B. A per-unit subsidy to consumers
• C. Government regulations banning the good
• D. A price floor on the good

Answer: (B)

When there is a positive externality, the social benefit from consuming the good exceeds the private benefit, so the market underconsumes relative to the socially efficient level. A subsidy to consumers lowers the effective price they pay, encouraging more purchases. By making private marginal benefit closer to the social marginal benefit, the subsidy internalizes part of the external benefit, pushing consumption up toward the socially optimal quantity.

The other options would not achieve this alignment. A per-unit tax would raise the price and reduce quantity, worsening underconsumption in this case. Banning the good eliminates consumption entirely, which is too extreme when there are positive external benefits. A price floor raises the price and typically reduces quantity, not helpfully increasing private consumption to match social benefits.