If the detriment to society from a negative externality is measure as $5 per unit of output of a particular good, the best way of moving closer to the social optimum would be to:
A)subsidize consumers who purchase the good by $5 per unit to offset the negative externality that they may endure.
B)limit the production of the good to four days per week.
C)calculate the negative value of the externality and assess a fine on each producer to pay for clean up in proportion to their profits from production of the good.
D)assess a simple tax of $5 per unit of production on suppliers of the good.

Question

Quizplus · Accepted Answer

The most effective way of addressing negative externalities is through a tax on the producer equal to the value of the negative externality. By imposing a tax of $5 per unit of production, the producer is forced to internalize the cost of the negative externality and adjust production levels accordingly to align with the social optimum. This approach creates an incentive for producers to find ways to reduce their production costs and reduce the level of negative externalities associated with their production process while still producing the good. The best way to internalize the negative externality and move closer to the social optimum is to impose a tax on suppliers of the good that equals the cost of the negative externality. In this case, a tax of $5 per unit of output would be necessary to reflect the cost imposed on society. By raising the cost of production, suppliers will produce less of the good which will reduce the negative externality and move production closer to the social optimum. Subsidizing consumers or limiting production would not directly address the negative externality, and fining producers based on their profits may not be effective in reducing the external cost.

If the Detriment to Society from a Negative Externality Is