Externality and Output In a positive externality, can government just set the price to the socially efficient price instead of a subsidy to correct an externality?
In principle in both positive and negative externality scenario government could just set price to the socially efficient price.
However, outside of static textbook example this is non-starter. The socially efficient price even in presence of externalities (positive or negative) is not constant and it will fluctuate across time. Hence government would have to always change the price it sets. This is problematic since estimating what the socially optimal price is in every instance and in real time is virtually impossible.
Consequently, it is considered more convenient to simply issue subsidy equal to the value of positive externality. In such way no matter how the socially optimal price fluctuates across time as long as the value of positive externality remains constant government does not need to change it across time. Value of positive externality that activity does without doubt fluctuates less frequently than prices so government wound need to reevaluate the subsidy just occasionally.