Question

Which of the following is true? If consumption of a good gives rise to a positive externality, it can be internalized by taxing the producers of the good. If production of a good gives rise to a positive externality, it can be internalized by taxing the consumers of the good. If production of a good gives rise to a negative externality, it can be internalized by taxing the producers of the good. If consumption of a good gives rise to a negative externality, it can be internalized by subsidizing the purchase of the good.

Answer 1

Answer:

If consumption of a good gives rise to a negative externality, it can be internalized by subsidizing the purchase of the good.

Explanation:

The effect of a market exchange on a third party who is outside or “external” to the exchange is called an externality or spill over.

Negative externality are negative spill over effects of a transaction, a situation where a third party, outside the transaction, suffers from a market transaction by others .

Internalizing the externality means shifting the burden, or costs, from a negative externality, such as pollution or traffic congestion, from outside to inside (external to internal). This can be done through taxes, property rights, tolls, and government subsidies.

A negative externality exists is the cost of production exceeds private costs

Hence, such negative externality can be internalized through subsidy by the government