The production of a particular good generates a negative externality. To reduce the amount of this externality, the government sets a limit on the quantity of the product that can be produced. This type of action shows the government ______ to deal with the externality.

Question

Quizplus · Accepted Answer

Setting a quota limits the production of the good, which directly reduces the negative externality created by its production. Imposing a tax or using a subsidy would be more effective in situations where the goal is to correct a positive externality or to generate revenue for the government. Private bargains involve negotiating between the parties involved to reach a mutually beneficial agreement, but may not be effective in addressing negative externalities, as the parties may not have an incentive to internalize the costs imposed on others.

The Production of a Particular Good Generates a Negative Externality