The government can act to internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Question

Quizplus · Accepted Answer

The government can use fiscal policy tools such as taxes and subsidies to adjust the prices of goods and services that have externalities. By imposing taxes on goods that have negative externalities such as pollution, the government can increase the cost of production and consumption of these goods, reducing their consumption and shifting consumption to alternatives with lower or no negative externalities. Conversely, by subsidizing goods with positive externalities such as education or healthcare, the government can lower the cost of consumption, increasing their uptake and resulting in overall positive benefits for society.

The Government Can Act to Internalize Externalities by Taxing Goods