How do government subsidies effectively address the issue of externalities in a market?

Government subsidies help to reduce the negative effects of externalities by providing financial support to businesses or activities that create positive outcomes for society. When a company produces a good that benefits everyone, like clean energy, the market might not reward them enough because people often don’t pay directly for these benefits. By giving subsidies, the government encourages more production of these goods, making them more affordable and accessible. For example, if a solar panel company receives a subsidy, it can lower its prices, leading more people to install solar panels, which helps the environment. This way, subsidies help align private incentives with social benefits, ultimately improving overall welfare.