Pigouvian subsidies

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A Pigovian subsidy is similar to a Pigovian tax, in which the main issue is to internalize within a firm, or service provider, a positive externality.

The motivation for such a subsidy is trying to reach economic efficiency. When a positive externality is present, a firm's solution of its utility maximization problem does not account for the additional utility (to another agent) produced as a by-product (the externality), thus causing the firm to produce less than the pareto-efficient level . The Pigouvian subsidy thus internalizes the externality into the agent's utility function, by giving the firm incentive to produce more than it otherwise would.

An example would be a central government transfer that accounts for interjurisdictional spillover (usually in the form of matching grants).

Mentioned in Oates, Essay in Fiscal Federalism

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