According to Pigou, the best way to deal with a negative externality is to
A)allow both parties to negotiate.
B)assign liability to the party with the highest cost of prevention.
C)assign liability to the party with the lowest cost of prevention.
D)tax it.

Question

Quizplus · Accepted Answer

Pigou's approach to dealing with negative externalities involves imposing a tax on the activity that generates the externality in order to internalize the cost that the activity imposes on society. This tax increases the cost of the activity for those engaged in it, reducing the quantity demanded and therefore reducing the negative externality. Pigou believed that this was the most efficient way to address negative externalities, as it ensures that the cost of the externality is borne by those responsible for it, rather than being shifted onto society as a whole.

According to Pigou, the Best Way to Deal with a Negative