Question

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer a. externalize the positive externality. b. externalize the negative externality. c. internalize the positive externality. d. internalize the negative externality.

Answer 1

d. internalize the negative externality.

Step-by-step explanation:

A negative externality is a cost incurred to a third party (not the producers or the buyers of the main products/services).

Because the producer didn't have to pay for the smell's negative effect (cost) on the community, his production costs are lower than the real costs and he can charge a lower price, selling more than the socially optimal quantity.

By making the producer pay the tax, that cost is then included into the production cost, making the good more expensive and thus selling less. Less production will create less smell.