To internalize a negative externality, an appropriate public policy response would be to
A) have the government take over the production of the good causing the externality.
B) ban the production of all goods creating negative externalities.
C) tax the good.
D) subsidize the good.

Question

Quizplus · Accepted Answer

Taxing the good that creates negative externalities would increase its cost to the producer, making production less profitable and reducing the amount produced. The tax revenue can be used to provide compensation to those affected by the negative externality, or to fund the development of alternative goods or services that do not create negative externalities. This would internalize the negative externality by making the producer pay for the cost they impose on society.

To Internalize a Negative Externality, an Appropriate Public Policy Response