When dealing with consumption externalities, the market equilibrium can be moved closer to the social equilibrium by:
A)taxing negative externalities and subsidising positive externalities
B)taxing both positive and negative externalities
C)subsidising both positive and negative externalities
D)none of the above because government has no corrective policy with regards to consumption externalities

Question

Quizplus · Accepted Answer

Taxing negative externalities (such as pollution) and subsidizing positive externalities (such as education) will increase the cost of producing goods with negative externalities and decrease the cost of producing goods with positive externalities, leading to a shift in the demand curve towards the socially optimal level of consumption. This would move the market equilibrium closer to the social equilibrium. Taxing both positive and negative externalities would be counterproductive, while subsidising both positive and negative externalities would be financially unsustainable. Option D is incorrect as the government can implement corrective policies, such as taxation and subsidies, to address consumption externalities.

When Dealing with Consumption Externalities, the Market Equilibrium Can Be