Question

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will a. give sellers the incentive to account for the external effects of their actions. b. increase demand. c. increase the amount of the commodity exchanged in market equilibrium. d. restrict the producers' ability to take the costs of the externality into account when deciding how much to supply.

Answer 1

Answer:

Answer a.

Explanation:

Negative externalities are a consequence of market activity, whose social cost is not covered by the private cost of such activity, resulting in over-consumption of the product. Resulting tax on such negative consequence can reduce demand and in the case of air polluting factories, for instance, enforce the company to pay social cost for its actions.