Which policy tool directly aligns private incentives with social benefits in the presence of a positive externality?

• A. Price floor
• B. Per-unit tax
• C. Subsidy to consumers or producers of the good
• D. Quota

Answer: (C)

When there’s a positive externality, the social value of the good exceeds what the private buyer or seller takes into account in their decision. A subsidy to either producers or consumers directly aligns private incentives with social benefits by increasing private marginal benefits (or lowering private marginal costs) by exactly the amount of the external benefit. This internalizes the externality: the decision-maker now faces a higher private benefit from producing or consuming, so the quantity moves closer to the social optimum and overall welfare rises.

Other tools don’t accomplish this alignment. A price floor changes the market price but doesn’t address the external benefit, so it doesn’t nudge the private decision toward the social value. A per-unit tax would discourage consumption and is used for correcting negative externalities, not positive ones. A quota restricts quantity and similarly fails to incorporate the external benefit into private incentives.