The government identifies a situation where production of a good is generating a negative externality.A reasonable option for the government to consider is to

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Imposing a tax on the sale of the good will increase its price, which will reduce consumers' demand for the good as they will now have to pay more. This will decrease the quantity of the good produced and consumed, thereby reducing the negative externality. The tax revenue can also be used by the government for other social programs or to incentivize the production of goods with positive externalities. Passing a law preventing the production or consumption of the good may be seen as too extreme and may face resistance from affected parties. Subsidizing the cost of producing the good or rationing the good may only exacerbate the negative externality by increasing its production and consumption.

The Government Identifies a Situation Where Production of a Good