Subsidies for Positive Externalities

Subsidies for positive externalities are a type of government intervention aimed at counterbalancing the failure of the free market to provide a social benefit. Positive externalities are beneficial external effects of a market activity that are not taken into account by the market price of the good or service produced. Examples include any activity that helps the environment, such as research and development of new renewable energy sources or energy-efficient technologies. Subsidies are used to provide incentives to private individuals and firms who produce goods and services that provide a positive externality. By providing financial incentives, governments enable the production of goods and services that would otherwise not be produced due to the typical market failure in which the marginal cost of production is lower than the marginal benefit to society. Subsidies can help create a situation in which private market actors have an incentive to allocate resources to activities that provide positive externalities that would otherwise not be produced due to market failures.