If a good causes a negative externality, regulation might take the form of a
A) tax.
B) requirement for consumption.
C) subsidy.
D) price ceiling.

Question

Quizplus · Accepted Answer

A tax is known as a Pigovian tax and is applied to the production or consumption of a good that creates a negative externality. The tax is used to increase the cost of production or consumption so that producers and consumers internalize the external cost and reduce the quantity demanded or supplied. This reduces the negative externality and promotes efficient outcomes.

If a Good Causes a Negative Externality, Regulation Might Take