Answer to Question #219136 in Microeconomics for CHIPMAN

Question

Evaluate with the aid of a diagram whether the government should intervene when a negative externality occurs. What could the government do to promote allocative efficiency?

Answer 1

Government can play a role in reducing negative externalities by taxing goods when their production generates spillover costs. This taxation effectively increases the cost of producing such goods.The use of such a tax is called internalizing the externality.