5. When a good or activity yields external benefits, such as technology spillovers, the marginal social benefit of the good or activity is equal to the marginal benefit accruing to consumers plus its marginal external benefit.

Without government intervention, the market produces too little of the good or activity. An optimal Pigouvian subsidy to producers, equal to the marginal external benefit, moves the market to the socially optimal quantity of production. This yields higher output and a higher price to producers. It is a form of industrial policy, a policy to support industries that are believed to generate positive externalities. Economists are often skeptical of industrial policies because external benefits are hard to measure and they motivate producers to lobby for lucrative benefits.