The government can internalize an externality by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Question

Quizplus · Accepted Answer

This statement is correct. By taxing goods that have negative externalities, such as cigarettes or pollutants, the government can reduce the consumption of these goods and offset their negative effects on society. Subsidizing goods that have positive externalities, such as education or clean technology, can encourage individuals and businesses to produce and consume these goods, thereby promoting social benefits. These actions help internalize the externality, meaning that the costs or benefits of a product or activity are fully reflected in its market price.

The Government Can Internalize an Externality by Taxing Goods That