To move closer to the social optimum when a negative externality exists, the cost to society of the externality should be:
A)incorporated/added on to the price so that demand reflects the true social costs.
B)calculated per unit and producers taxed accordingly with a goal of making the supply curve reflective of the marginal social cost of the externality.
C)minimized by forcing producers of the externality to shut down when they produce a negative externality.
D)minimized by subsidizing the producers of the externality.

Question

Quizplus · Accepted Answer

Option B is the correct choice as it suggests taxing producers that create negative externalities such that the supply curve reflects the marginal social cost of the externality. This approach reduces the quantity of the good being produced which lowers the level of negative externalities generated. Adding the cost to the product price (Option A) is not very effective in reducing negative externalities. Forcing producers to shut down (Option C) can lead to significant economic inefficiencies and loss of employment. Subsidizing (Option D) the producers of negative externalities worsens the problem as it encourages them to increase production which results in more negative externalities. By calculating the cost of the negative externality per unit and taxing producers accordingly, the supply curve will reflect the marginal social cost of the externality. This will encourage producers to internalize the cost of the externality and reduce their output to the socially optimal level, leading to a more efficient allocation of resources. Incorporating the cost into the price or forcing producers to shut down may not provide the same level of incentive for producers to reduce their negative impact on society. Subsidizing the producers of the externality would only exacerbate the problem by encouraging more production of the negative externality.

To Move Closer to the Social Optimum When a Negative