Question

Determine whether the following government intervention would used to correct a negative or positive externality.

a. A subsidy to consumers

b. A pigovian tax on sellers

c. Direct controls or limits on the market.

d. A subsidy to producers

e. Direct provision or offering of the product.

Answer 1

In case of positive externality, more should be produced or consumed and in case of negative externality, less should be produced or consumed.

A) subsidy to consumers- positive externality

Subsidy to consumers tends to increase consumption which is needed to correct positive externality.

B) A pigovian tax on sellers- negative externality

Tax on sellers reduces production and lower quantity should be produced in negative externality.

C) a direct control or limits on the market- negative externality

D) A subsidy to producers- positive externality

E) direct provision or offering of the product- positive externality