Consider the case of a good with external benefits. If you plant trees in front of your house, the neighborhood is more attractive, and trees create shade, provide oxygen, and a home for birds and squirrels. Thus the benefits to society are greater than the benefits to you. If the planting of trees is a private choice, you will plant too few trees relative to the socially optimal quantity, because the private value to you is less than the social value.
1. Which of the following would not help to correct this problem?
a. Subsidize consumer purchases of trees to plant.
b. Tax homeowners who plant trees.
c. Subsidize nurseries that sell trees for planting.
d. Have the government provide trees to homeowners.
e. All of the above would help to correct the problem.
2. If the government pays for a program to increase the planting of trees, who will win and lose from the program?
Winners will be:_____.
a. producers
b. society as a whole
c. taxpayers
d. consumers
Losers will be:_.
a. producers
b. society as a whole
c. consumers
d. taxpayers
3. The gains to the winners will be _______ the losses to the losers.
greater than - equal to - less than

A good has positive externality if the benefits to third parties not involved in production is greater than the cost. an example of an activity that generates positive externality is research and development. Due to the high cost of R & D, they are usually under-produced. Government can encourage the production of activities that generate positive externality by granting subsidies.

Taxing homeowners who plant trees would increase the cost of planting and thus discourage planting

Everyone would benefit from a project that generates positive externality.

If the government pays for a program to increase the planting of trees, the cost would be borne by taxpayers. So, they lose