Which of the following best describes a subsidy in relation to externalities?

A subsidy is a financial support given by the government to encourage certain activities or behaviors that have positive effects on society. In the context of externalities, a subsidy can help reduce the negative impacts of externalities, which are costs or benefits that affect people who are not directly involved in a transaction. For example, if a factory pollutes a river, the community suffers from dirty water, which is a negative externality. To address this, the government might provide a subsidy to companies that invest in cleaner technologies, making it cheaper for them to reduce pollution. This way, the subsidy helps encourage actions that benefit everyone and lead to a healthier environment.