The net increase to total surplus when a negative externality is internalized is due to:
A)the transfer of surplus from those affected by the externality to the consumer.
B)the reduced number of transactions in the market.
C)the transfer of surplus from consumer or producer to those affected by the externality.
D)None of these statements is true.

Question

Quizplus · Accepted Answer

Internalizing a negative externality involves correcting the market failure by incentivizing the polluter/producer to reduce their harmful actions. This leads to a reduction in the negative externality and an increase in total surplus as the costs of the harm on third parties are reduced. This happens through a transfer of surplus from the producer/consumer to those affected by the externality. Thus, option C is the correct answer. Option A is incorrect as there is no transfer of surplus from those affected by the externality to the consumer. Option B is also incorrect as reducing the number of transactions in a market would decrease total surplus rather than increasing it. Option D is incorrect as the other options are more correct than this statement.

The Net Increase to Total Surplus When a Negative Externality