If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by:
A) taxing sardine tins at a rate of $1 per tin.
B) subsidizing sardine tins at a rate of $1 per tin.
C) capping total sardine consumption at 1000 tins per day.
D) banning sardines.

Question

Quizplus · Accepted Answer

By taxing sardine tins at a rate of $1 per tin, the price paid by consumers will increase by $1, which will decrease the consumption of sardine tins among non-sardine-eaters. This leads to a reduction in the externality and an efficient outcome.

If a Tin of Sardines Creates a Noxious Odor for Non-Sardine-Eaters