Which of the following is a policy approach to negative externalities?

Question

BlackTom AI · Accepted Answer

The question asks you to identify a policy approach to negative externalities.
Option 1: 'Paying subsidies to producers of the related good' is aimed at supporting production, which tends to encourage more of the good and can exacerbate negative externalities rather than mitigate them. In general, subsidies are used to correct positive externalities, not to address negative ones.
Option 2: 'Levying taxes or charges on the related good' directly targets the social cost by making the private cost higher, reducing demand or production to align private behavior with social welfare. This is a classic Pigouvian-style policy for correcting negative externalities.
Option 3: 'Eliminating taxes or charges on the related good' would remove any price-based incentive to reduce consumption or production, likely increasing negative externalities rather than limiting them.
Option 4: 'Having the government produce a version of the related good' is a government provision approach that may be used in specific contexts, but it does not constitute a general policy instrument for addressing externalities, and it often has efficiency and implementation drawbacks compared to standard taxes or charges.
In summary, among the listed options, the approach that directly employs pricing to reflect external costs and curb negative externalities is the imposition of taxes or charges on the related good.

Which of the following is a policy approach to negative externalities?

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