Question

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by

a. taxing sardine tins at a rate of $1 per tin.
b. subsidizing sardines tins at a rate of $1 per tin.
c. capping total sardine consumption at 1000 tins per day.
d. banning sardines.

Answer 1

To address the odorous externality from sardine tins, the government could impose a $1 tax per tin, effectively internalizing the external cost and leading to a more efficient market outcome (a).

Step-by-step explanation:

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by taxing sardine tins at a rate of $1 per tin. This approach aligns with economic principles that suggest taxing polluting goods is a more flexible and cost-effective method to address pollution than command-and-control regulation.

By imposing a tax that is equivalent to the negative externality, you effectively incorporate the external cost into the price, leading the market to self-adjust and reduce the externality. This is similar to the concept of a pollution tax, like the refundable charge for returning recyclable cans and bottles, which provides an incentive to reduce littering.