Final answer:
Governments respond to externalities mainly through regulations and market-based instruments such as taxes and subsidies, aiming to correct the negative impacts such as pollution and to encourage positive economic behaviors.
Step-by-step explanation:
The two main ways governments respond to externalities are d) By using regulations and market-based instruments such as taxes and subsidies. When negative externalities, like pollution, are produced through economic activities, governments can intervene using command-and-control approaches, which may involve regulations compelling businesses to reduce their negative impact or fines for non-compliance. Alternatively, governments employ market-based instruments, setting taxes on goods that create externalities or providing subsidies to encourage more desirable behaviors.
It is recognized that government intervention is not perfect and may not always reflect the majority's views. Therefore, the strengths and weaknesses of both the markets and government actions should be carefully considered. They should neither be idealized nor demonized, but instead, real-world conditions should be taken into account to make sensible economic policies.