If a positive externality exists, the private market equilibrium quantity will be less than the socially optimal quantity, since the marginal social benefit exceeds the marginal private benefit.
A good has positive externality if the benefits to third parties not involved in production is greater than the cost of production. An example of an activity that generates positive externality is research and development. As a result of the huge capital outlay associated with R &D, they are usually under-produced.
Government can encourage the production of activities that generate positive externality by granting subsidies.
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