In order to achieve a socially optimal level of output, goods that entail negative externalities should be:
A)banned.
B)subsidized.
C)taxed.
D)provided by the government.

Question

Quizplus · Accepted Answer

When goods and services generate negative externalities, the costs imposed on third parties are not reflected in the prices paid by consumers and producers, resulting in market failure. A tax or a fee on these goods can internalize the externalities by making the price paid by consumers equal to the social cost, leading to a lower level of production and consumption. Subsidizing these goods would have the opposite effect and result in overproduction, leading to an even greater negative social cost. Banning the production of these goods is not always practical or desirable. Providing these goods through the government is also not always feasible or efficient.

In Order to Achieve a Socially Optimal Level of Output