Sometimes the government deals with externalities by creating laws to regulate behavior instead of using taxes to correct the market failure. So, requiring auto manufacturers to install a device called a catalytic converter which removes some toxins from exhaust may be preferable to a gas tax that reduces driving levels. This route is often preferred because:

Question

Quizplus · Accepted Answer

Regulating behavior through laws like requiring catalytic converters can be more direct and equitable, as it targets the source of pollution without penalizing drivers of clean cars (C) and addresses the issue even when the cost of the externality is unknown (E).

Sometimes the Government Deals with Externalities by Creating Laws to Regulate