Question

If a good that generates negative externalities were priced to take into account these negative externalities, then its:A) Price would decrease and its output would increaseB) Output would increase but its price would remain constantC) Price would increase and its output would decreaseD) Price would increase but its output would remain constant

Answer 1

C) Price would increase and its output would decrease

Step-by-step explanation:

Negative externality is when the cost of economic activities to third parties exceeds the benefits.

Government can discourage the production of activities that produce negative externality by imposing tax. This type of tax is known as pigouvian tax. This tax increases cost and discourages production and reduces output.

For example, smoking is an activity that produces negative externality by harming non smokers around. Government can impose taxes on cigarettes, this would increase the price of cigarettes. Cigarettes would become more expensive and the quantity consumed would fall and as a result the output of negative externality (smoke) would fall.

I hope my answer helps you.