A viable government solution to an external cost is a:
A) tax on the party producing the cost.
B) subsidy to the party producing the cost.
C) tax on the party incurring the cost.
D) subsidy to the party incurring the cost.

Question

Quizplus · Accepted Answer

The most common and effective solution to an external cost is to impose a tax on the party producing the cost. This tax is called a Pigouvian tax, named after economist Arthur Pigou, and it is meant to internalize the external cost by making the party responsible for paying for it. By increasing the cost of producing a good or service, the tax provides an incentive for the producer to reduce their production or find ways to produce in a more environmentally friendly manner. It also provides revenue for the government, which can be used to compensate those affected by the external cost or invested in environmental conservation efforts. Subsidies, on the other hand, would only worsen the problem by encouraging the party responsible for the external cost to produce more.

A Viable Government Solution to an External Cost Is A