If there are both external benefits and external costs associated with the production and consumption of a good, and the external benefits are less than the external costs,
A)Taxing it could bring us closer to the efficient solution
B)Subsidizing it could bring us closer to the efficient solution
C)Neither a tax or a subsidy could bring us closer to the efficient solution
D)None of the above is true.

Question

If there are both external benefits and external costs associated with the production and consumption of a good, and the external benefits are less than the external costs,
A)​Taxing it could bring us closer to the efficient solution
B)​Subsidizing it could bring us closer to the efficient solution
C)​Neither a tax or a subsidy could bring us closer to the efficient solution
D)​None of the above is true.

Quizplus · Accepted Answer

Taxing the good with external costs would increase its price, reducing the quantity demanded and shifting the market towards a lower equilibrium quantity. This would reduce the negative externality, bringing us closer to the efficient solution. However, subsidizing the good with external benefits would increase the quantity demanded and shift the market towards a higher equilibrium quantity, exacerbating the positive externality and leading to an inefficient outcome. Therefore, taxing is the best option in this scenario.

If There Are Both External Benefits and External Costs Associated