Suppose manufacturing of paper results in substantial ground-water pollution. One possible policy that can be used to fix this externality is:
A)to subsidize the production of paper by the domestic firms.
B)to impose tax on the production of paper.
C)to raise tariff barriers on paper imports.
D)to provide tax benefits to the firms exporting paper.

Question

Quizplus · Accepted Answer

Imposing a tax on the production of paper would increase the cost of producing paper, thereby incentivizing firms to find ways to reduce pollution and limit the negative externality. This would allow for a more efficient allocation of resources and internalize the external cost of pollution. Subsidizing the production of paper would have the opposite effect and likely worsen the pollution problem. Tariff barriers on paper imports or tax benefits for firms exporting paper do not address the issue of pollution resulting from domestic manufacturing of paper.

Suppose Manufacturing of Paper Results in Substantial Ground-Water Pollution