Question

Which of the following statements is correct? a. Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and decrease the price of the good produced. b. Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced. c. Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced. d. Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced.

Answer 1

Answer:

The answer is (A) Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and decrease the price of the good produced.

Explanation:

A negative externality is commonly defined as the cost that a third party (also known as consumers) must pay when they chose to be involved in a transaction. This cost is not directly incurred – rather, it is a side effect of the transaction the consumers chose to engage in. An example would be – by choosing to purchase gasoline, the consumers create an additional cost of air pollution when using the product. When an economic firm chose to internalize a negative externality – they would choose to decrease the production of the product, and the price of the goods.