Question

If an activity generates a positive externality, the government can increase total economic surplus by ___ the activity, and if an activity generates a negative externality, the government can increase total economic surplus by ______ the activity. A. taxing: banning B. subsidizing: banning C. subsidizing: taxing D. publicizing: taxing

Answer 1

Answer:

C. subsidizing: taxing

Explanation:

An activity generates a positive externality if the benefits of economic activities to third parties exceeds its costs.

Example of activities that generate positive externality are education and research.

Government ought to encourage the production of activities that generates postive externality. One of the ways this can be done is through Subsidy. Subsidy reduces cost of production and increases production.

An activity generates negative externality if the benefits of economic activities to third parties is less its costs.

An example of negative externality is pollution.

Government can discourage activities that generates negative externality by taxation. Taxation increases the cost of production and discourages production.

I hope my answer helps you