When a producer operates in a market characterised by negative production externalities, a tax that forces them to internalise the externality will:
A)give sellers the incentive to take account of the external effects of their actions
B)have an offsetting effect that reduces the producer's private production costs
C)increase the amount of the commodity exchanged in market equilibrium
D)restrict the producer's ability to take the costs of the externality into account when deciding how much to supply

Question

Quizplus · Accepted Answer

The tax will give producers an incentive to take account of the external effects of their actions, as it increases the cost of production and forces producers to bear some of the cost of the negative externalities they are creating. This will lead them to consider alternative production methods that are less harmful to the environment or to reduce their level of production altogether. Options B, C, and D are incorrect, as a tax will not reduce production costs, increase the amount of the commodity exchanged, or restrict the producer's ability to take the costs of the externality into account when deciding how much to supply.

When a Producer Operates in a Market Characterised by Negative