Suppose the government imposes a tax in a certain market in order to internalize an externality. This type of policy is based on which of the Ten Principles of Economics?
A)People face trade-offs.
B)People respond to incentives.
C)Markets are usually a good way to organize economic activity.
D)The cost of something is what you give up to get it.

Question

Quizplus · Accepted Answer

The principle that people respond to incentives suggests that if a tax is imposed, buyers and sellers in the market will adjust their behavior in response to the financial incentive to either reduce consumption of the good producing the negative externality or produce the good in a more socially optimal way. This will help internalize the externality by addressing the market failure that exists without government intervention.

Suppose the Government Imposes a Tax in a Certain Market