Question

Which of the following statements is correct?

Select one: a. internalising 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. internalising 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. internalising 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. internalising 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 is option 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.

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Explanation:

Negative production externalities occur when the production process results in a harmful effect on unrelated third parties. For example, manufacturing plants cause noise and atmospheric pollution during the manufacturing process.One of the solutions to negative externalities is to impose taxes to change producer's behavior.As taxes are imposed cost of production rises and industry reduces the supplies and increase the price to meet excess cost of production.