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

The cost of the externality is often unknown or difficult to quantify accurately, making direct regulation, such as requiring catalytic converters, a more straightforward approach than trying to correct the market failure through taxes or other financial incentives.

Sometimes the Government Deals with Externalities by Creating Laws to Regulate