Which of the following are solutions that governments use to counter overproduction caused by negative externalities?

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BlackTom AI · Accepted Answer

The question asks which policy tools governments use to counter overproduction caused by negative externalities. 
Option 1: Pigovian taxes. This approach directly targets the external cost by making producers pay a tax equal to the marginal social cost of the negative externality, thereby reducing output to the social optimum. It aligns with standard Pigovian efficiency principles and is a classic countermeasure to overproduction.
Option 2: Government provision. While government provision can address underprovision or public goods, it is not a typical method for correcting overproduction caused by negative externalities. In many cases, government provision would increase total output or not address the external cost directly, which is counterproductive for overproduction problems.
Option 3: Subsidies. Subsidies generally encourage more production or consumption, especially when directed at producers or consumers. In the presence of a negative externality, subsidies would worsen the market failure by increasing the scale of the activity that imposes costs on others, rather than reducing it.
Option 4: Direct controls. Also known as prohibitions or quantity restrictions, direct controls set a legal limit on the amount produced or the level of activity. While effective in reducing overproduction, they can be blunt instruments and may not align with the least-cost approach, but they are a valid tool; however, the question asks for solutions used by governments, and Pigovian taxes are a precise economic instrument designed to correct the externality price, often preferred over blunt direct controls.
In this context, the policy that correctly explains the standard countermeasure to negative externalities is Pigovian taxes, which internalize the external cost directly into the producer's decision-making process.

Which of the following are solutions that governments use to counter overproduction caused by negative externalities?

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