Which of the following is true?
A) If the consumption of a good gives rise to a positive externality, it can be internalized by taxing the producers of the good.
B) If the production of a good gives rise to a negative externality, it can be internalized by taxing the producers of the good.
C) If the production of a good gives rise to a positive externality, it can be internalized by taxing the consumers of the good.
D) If the consumption of a good gives rise to a negative externality, it can be internalized by subsidizing the purchase of the good.

Question

Quizplus · Accepted Answer

A negative externality arises when the production of a good imposes costs on third parties. To internalize this externality, a tax can be imposed on the producers of the good, forcing them to bear the cost of the externality they create. This tax would increase the cost of production for the producers, which in turn would reduce the quantity of the good produced and consumed, leading to a more socially efficient outcome.

Which of the Following Is True