The graph to the right shows a perfectly competitive firm which generates a positive externality, so SMC < PMC.

    Suppose the firm is given a Pigouvian Subsidy (PS) equal to the marginal benefit generated by the externality associated with each unit of output. The subsidy could be paid directly or in the form of tax credits. Either way, the firm would receive the benefits of the positive externality it generates in the form of lower production costs, and would thus find it profit maximizing to produce the allocatively efficient amount, QAE. Computing the marginal benefit of a positive externality is no easier than computing the marginal harm of a negative externality.

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