Question

For positive externality the government may impose a subsidy while for negative externality the government may offer a tax.

A) subsidy; subsidy
B) subsidy; tax
C) tax; tax
D) tax; subsidy

Answer 1

A positive externality can be addressed through a subsidy, while a negative externality can be addressed through a tax.

Step-by-step explanation:

A positive externality occurs when a third party benefits from a transaction between two other parties. To address a positive externality, the government may choose to impose a subsidy. A subsidy is a payment or tax reduction given to producers to encourage the production of goods or services that generate positive externalities. For example, the government may provide a subsidy to farmers who use sustainable farming practices to reduce pollution and benefit the environment.

On the other hand, a negative externality arises when a third party is harmed by a transaction between two other parties. To address negative externalities, the government may offer a tax. A tax is a fee imposed on producers or consumers to discourage the production or consumption of goods or services that generate negative externalities. For instance, the government may impose a tax on industries that emit harmful pollutants into the atmosphere to incentivize them to reduce pollution.