If the government wishes to encourage firms to internalize externalities, they should ________ activities resulting in negative externalities and ________ activities resulting in positive externalities
A) tax; subsidize
B) subsidize; tax
C) ban; generate
D) place an injunction against; tax

Question

Quizplus · Accepted Answer

Taxing activities that result in negative externalities makes those activities more expensive for firms, encouraging them to reduce or eliminate the negative externalities. Subsidizing activities that result in positive externalities encourages firms to engage in more of those activities, increasing the positive externalities.

If the Government Wishes to Encourage Firms to Internalize Externalities