Question

Question 1:

Which of the following is a cost of internalizing a negative externality? Question 4

a) Less output is produced.

b) The deadweight loss is larger.

c) The level of pollution rises.

d) Taxes must increase to cover the external cost.

e) The government must pay firms to encourage them to change production techniques.

Question 2:

The government identifies a situation where production of a good is generating a negative externality. A reasonable option for the government to consider is to:

	a) impose a tax on the sale of this good.
	b) pass a law preventing the production of this good.
	c) subsidize the cost of producing the good.
	d) pass a law preventing the consumption of this good.
	e) ignore the problem.

Answer 1

Q1
Answer
Option d
d) Taxes must increase to cover the external cost.
to internalize a negative externality government should increase tax equal to the external cost of the per unit production.
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Q2
Answer
Option a
a) impose a tax on the sale of this good.
The government should impose a tax on the good to reduce the production of the socially optimum level of output.
Preventing it from the law will lead to a loss in total surplus and an economically efficient quantity will be produced imposing tax.