If the government wishes to encourage firms to internalize externalities, they should tax activities resulting in ________ externalities and subsidize activities resulting in ________ externalities.
A) negative; positive
B) positive; negative
C) no; positive
D) negative; no

Question

Quizplus · Accepted Answer

To encourage firms to internalize externalities, the government should tax activities that result in negative externalities (to discourage harmful impacts on third parties) and subsidize activities that result in positive externalities (to encourage beneficial impacts on third parties).

If the Government Wishes to Encourage Firms to Internalize Externalities