AP Microeconomics – Market Failure And The Role Of Government Practice Test

A positive externality in consumption means the social benefit from consuming the good exceeds the private benefit to the buyer, so people tend to underconsume relative to the social optimum. A per-unit subsidy to consumers lowers the price they effectively pay and raises the quantity demanded, nudging private marginal benefit up toward the social marginal benefit. This internalizes part of the external benefit and moves the market toward the efficient level of consumption. A per-unit tax would raise the price further and reduce quantity, worsening underconsumption. A government ban eliminates the good altogether, removing both private use and the external benefits. A price ceiling can create shortages or misallocate resources and doesn’t directly address the positive externality by boosting social benefits.