Question

Assume that production from an electric utility caused acid rain. If the government imposed a tax on the utility equal to the cost of the acid rain, the government's action would be an example of

a. supply side economic policy.
b. internalize the externality.
c. externalize the externality.
d. result in a marginal social benefit greater than the marginal cost of the electricity.

Answer 1

b. internalize the externality.

Step-by-step explanation:

Externality is a microeconomic concept that aims to explain the positive or negative impact that an economic activity has on third parties. If by exercising an economic activity, a company indirectly benefits society or community, the externality is positive. If economic activity negatively impacts the surrounding community, externality is said to be negative.

For example, acid rain caused by energy concersionary is a negative externality as it affects the whole of society. Thus, the tax acts as a way of forcing the adversary to internalize this externality, that is, the company will bear the pollution emitted in the form of a cost. Thus, the company is expected to take steps to minimize the impact of acid rain on society as a whole.