If the production of a product results in significant external costs, an appropriate government policy might be to
A) subsidize the production of the good.
B) tax producers and thus shift the supply curve to the left.
C) tax consumers' incomes and thus shift the demand curve to the left.
D) subsidize consumers since the good is being under-consumed.

Question

Quizplus · Accepted Answer

Taxing producers will increase the cost of production and therefore reduce the quantity supplied, shifting the supply curve to the left. This will help internalize the external costs by reflecting them in the market price. Subsidizing production or consumption would not address the issue of external costs and may even worsen the problem if it encourages more production/consumption. Taxing consumers' incomes would not be effective as it would not directly target the production causing the external costs.

If the Production of a Product Results in Significant External