Internalizing a negative externality means _____.
A)changing the incentives of consumers to ignore the externality
B)changing the incentives of producers to act as if there were no market for the external cost
C)changing the incentives of producers to act as if there were a market for the external cost
D)changing the incentives of consumers to complain about the externality to the producers

Question

Quizplus · Accepted Answer

Internalizing a negative externality means that the producer is made responsible for paying the cost of the externality and is incentivized to reduce it. This is achieved by creating a market for the external cost, which encourages producers to factor it into their production decisions. Changing the incentives of consumers, as suggested in options A and D, would not address the externality at its root cause. Option B suggests removing the producer's incentives to consider the externality, which is the opposite of what should happen when internalizing a negative externality.

Internalizing a Negative Externality Means _____