Government can internalise an externality by taxing the goods that have negative externalities and subsidising the goods that have positive externalities.

Question

Quizplus · Accepted Answer

By taxing goods with negative externalities, the government can make their market price reflect their true social cost and reduce their consumption. Similarly, by subsidising goods with positive externalities, the government can make their market price lower than their true social benefit and increase their consumption. This internalises the externalities and creates incentives for individuals and firms to take into account the social costs and benefits of their actions.

Government Can Internalise an Externality by Taxing the Goods That