Final answer:
The correct answer is C) Subsidies for the activity causing the externality. Subsidies would not help to reduce the problem when social costs exceed social benefits.
Step-by-step explanation:
The correct answer is C) Subsidies for the activity causing the externality. Subsidies are financial incentives provided by the government to encourage production or consumption of a particular good or service. In this case, if the government were to provide subsidies for the activity causing the externality, it would actually promote and increase the level of the activity, exacerbating the problem of social costs exceeding social benefits. The other options, including government regulations, taxes on the activity causing the externality, and private negotiations and agreements, are all potential solutions to reduce the problem of social costs exceeding social benefits.