To internalize a negative externality:
A)a producer's costs could be reduced by an amount equal to the external cost resulting from the production of a good.
B)a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good.
C)a producer could receive a subsidy equal to the external cost resulting from the production of a good.
D)None of the above are correct.

Question

To internalize a negative externality:
A)​a producer's costs could be reduced by an amount equal to the external cost resulting from the production of a good.
B)​a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good.
C)​a producer could receive a subsidy equal to the external cost resulting from the production of a good.
D)​None of the above are correct.

Quizplus · Accepted Answer

To internalize a negative externality, the producer's costs should be increased by an amount equal to the external cost resulting from the production of a good. By doing so, the producer will consider the external cost in the production decision, and it will lead to a reduction in the quantity of the good produced, which, in turn, will reduce the negative externality.

To Internalize a Negative Externality