A policy that directly targets the externality:
A) encourages innovation, which matches the goal to stop production of the externality.
B) gives firms incentives to find different ways to do things, rather than pay for the right to create the externality.
C) Both of the above statements is true.
D) None of these statements are true.

Question

Quizplus · Accepted Answer

A policy that directly targets the externality will incentivize firms to find innovative solutions to reduce or eliminate the externality. By doing this, the policy encourages innovation (statement A) while also giving firms an economic incentive to find alternate ways to operate (statement B). Therefore, both statements are true.

A Policy That Directly Targets the Externality