When an activity produces a negative externality:
A) increases in the activity should be encouraged by increasing taxes and/or fines.
B) decreases in the activity should be encouraged by increasing taxes and/or fines.
C) increases in the activity should be encouraged by offering grants and/or subsidies.
D) decreases in the activity should be encouraged by offering grants and/or subsidies.

Question

Quizplus · Accepted Answer

When an activity produces a negative externality, it means that it has harmful effects on third parties not involved in the activity. To reduce these harmful effects, policy measures such as increasing taxes and/or fines can be used to discourage the activity, thus aiming to decrease its occurrence.

When an Activity Produces a Negative Externality