Govt intervention to correct market failure

A pigouvian subsidy is a subsidy that is used to encourage behaviour that have positive effects on others who are not involved or society at large. Behaviour or actions that are a benefit to others who are not involved in the transaction are called positive externalities. A Pigovian subsidy works on the principle that if a good has positive externalities, then it will be under-consumed in a free market. The government can give a subsidy equal to the marginal external benefit of the good. Thus it doesn't help in increasing production but helps in bringing down the negative externalities due to price rise as costs are involved in creating positive externalities.

Sudha Reddy

CA Final

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21-May-20 12:29

Thanks

Thread Starter

The Little Brown Girl

CA Inter

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21-May-20 20:20