To correct for negative externalities, the government
A) should allow the price system do the correction.
B) can impose a tax.
C) can provide a subsidy to consumers.
D) should create a public good.

Question

Quizplus · Accepted Answer

Imposing a tax on the production or consumption of goods that create negative externalities is an effective way to reduce their output and encourage the production and consumption of alternative goods that do not have negative externalities. This tax creates an additional cost for producers and consumers that reflects the social costs of the externality, making the price of the good more accurately reflect its true cost to society as a whole. This can help reduce inefficiencies, improve resource allocation, and protect the environment or public health. The other options may be useful in other circumstances, but they are less effective at correcting negative externalities.

To Correct for Negative Externalities, the Government