Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?
A)impose a tax on alcohol that is equal to the per-unit externality
B)offer a subsidy on alcohol that is equal to the per-unit externality
C)impose a regulation limiting the amount of alcohol that each consumer can purchase
D)nothing

Question

Quizplus · Accepted Answer

Imposing a tax on alcohol that is equal to the per-unit externality can increase the price of alcohol and reduce the quantity demanded, leading to a decrease in the negative externality. This approach can help move the market equilibrium closer to the socially optimal quantity of alcohol. Offering a subsidy on alcohol is not appropriate in this case as it would encourage more alcohol consumption, exacerbating the negative externality. Limiting the amount of alcohol each consumer can purchase directly interferes with individual choice and may not effectively address the negative externality. Doing nothing means that the market will continue to produce an inefficient quantity of alcohol.

Suppose That Alcohol Consumption Creates a Negative Externality