A Pigouvian subsidy is a government payment designed to encourage the production or consumption of a good that generates positive externalities, such as vaccinations or renewable energy.

Just as a Pigouvian tax corrects the overproduction of harmful goods (negative externalities), a Pigouvian subsidy corrects the underproduction of beneficial goods. Because the free market ignores the broader societal benefits of things like education or solar panels, the subsidy lowers the effective price, aligning private incentives with the socially optimal level of consumption.