Question

Suppose the hot sauce firm cannot reduce the externality without reducing costs. What is a possible next step the government could take to reduce it?.

Answer 1

Create a limit on the maximum no. of bottles the firm can make,

The required details about externality is mentioned in below paragraph.

How Do Externalities Work?

An externality is a cost or benefit a producer generates but does not personally bear or receive. An externality can result from the creation or consumption of a good or service and can be both positive and negative.

Externalities happen when creating or consuming a good has an effect on parties who are not involved in the transaction directly. Externalities can be either good or bad. They can result from either production or consumption as well. For instance, simply entering a city center will increase the pollution and traffic for individuals who live there.

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