Which action should government take in order to internalize externalities
A)Government should tax goods with negative externalities and subsidize goods with positive externalities.
B)Government should tax goods with either positive or negative externalities.
C)Government should subsidize goods with either positive or negative externalities.
D)Government should tax goods with positive externalities and subsidize goods with negative externalities.

Question

Quizplus · Accepted Answer

Taxing goods with negative externalities creates a disincentive for people to buy those goods because they have to pay a higher price. This reduces the demand for those goods, which in turn reduces the negative impact on society from the externality. At the same time, subsidizing goods with positive externalities makes them cheaper and more attractive, which increases demand and encourages people to consume them. This helps to increase the positive impact on society from the externality. By doing both of these things, the government can internalize externalities and ensure that the costs and benefits are reflected in the market prices. Option B is not the best choice because taxing goods with positive externalities would discourage people from buying them, which would be counterproductive. Option C is not the best choice because subsidizing goods with negative externalities would encourage people to buy them, which would also be counterproductive. Option D is not the best choice because it would have the opposite effect of what is needed: encouraging consumption of goods with negative externalities and discouraging consumption of goods with positive externalities.

Which Action Should Government Take in Order to Internalize Externalities