With a positive externality, a competitive free market will produce too little of the good. With
a negative externality, a competitive free market will produce too much of the good.The allocative inefficiency caused by an externality provides a justification
for government intervention. In the case of a negative externality, the
government may levy a tax on the firms or consumers responsible, as is
often done in the case of pollution; we explore specific policies to address
pollution externalities in Chapter 17. In the case of positive
externalities, the government may provide a subsidy (a negative tax) to
the firms or consumers responsible, as is done in the case of publicly
provided education; we examine education and other social policies in
Chapter 18.