Which of the following statements is TRUE?
I. A Pigouvian subsidy reduces the market price to encourage consumption and correct for the underproduction of a good.
II. A Pigouvian tax increases the market price to discourage consumption and correct for the overproduction of a good.
III. Negative externalities create deadweight losses, but positive externalities do not.
A) III only
B) I, II, and III
C) I and II only
D) I only

Question

Quizplus · Accepted Answer

Statement I is true. Pigouvian subsidy reduces the market price to encourage consumption of goods that have positive externalities, thereby correcting the underproduction of such goods. 
Statement II is also true. Pigouvian tax increases the market price to discourage consumption of goods that have negative externalities, thereby correcting the overproduction of such goods. 
Statement III is false. Both positive and negative externalities create deadweight losses. Positive externalities may be underprovided in the absence of government intervention.

Which of the Following Statements Is TRUE