If the production of a particular good involves significant external costs, what might the government do to force the externality to be internalized?
A) Offer a subsidy for production of the good in order to increase production.
B) Offer a subsidy for production of the good in order to decrease production.
C) Impose a tax on production of the good in order to decrease production.
D) Impose a tax on production of the good in order to increase production.

Question

Quizplus · Accepted Answer

The government could impose a tax on production of the good in order to decrease production and force the externality to be internalized. This is known as a Pigouvian tax and it is designed to make producers pay for the costs that they are imposing on society. By raising the cost of production, firms will be incentivized to reduce their output and find more efficient ways of producing the good, which will lead to a reduction in external costs.

If the Production of a Particular Good Involves Significant External