Which of the following statements describes the best way to internalize a negative externality?
A) A producer's cost could be reduced by an amount greater than the external cost resulting from the production of a good.
B) A producer could receive a subsidy equal to the external cost resulting from the production of a good.
C) A producer's costs could be reduced by an amount equal to the external cost resulting from the production of a good.
D) A producer's costs could be increased by an amount equal to the external cost resulting from the production of a good.

Question

Quizplus · Accepted Answer

Internalization of a negative externality means that the producer is made to bear the external cost resulting from the production of a good. In order to achieve this, the producer's costs have to be increased by an amount equal to the external cost. This incentivizes the producer to reduce the negative externality by finding ways to reduce their production levels or to implement more environmentally-friendly production methods. A and B are incorrect because they do not require the producer to bear the full cost of the externality, while C is incorrect because it only requires the producer to bear a part of the externality cost instead of the full cost.

Which of the Following Statements Describes the Best Way to Internalize