Suppose the production of a good involves significant external benefits. To force the externality to be internalized, the government can:
A)impose a tax on the production of the good in order to increase its production.
B)impose a tax on the production of the good in order to decrease its production.
C)offer a subsidy on the production of the good in order to increase its production.
D)offer a subsidy on the production of the good in order to decrease its production.
E)regulate the supply of the good by preventing the producers from producing too much of the good.

Question

Quizplus · Accepted Answer

A subsidy would encourage producers to produce more of the good with external benefits, thus internalizing the externality. This approach is also a form of positive reinforcement that rewards the desired behavior (production of the good with external benefits) rather than punishing unwanted behavior.

Suppose the Production of a Good Involves Significant External Benefits