What is meant by the term internalizing an externality? How does ...

[Bob-Dole]

What is meant by the term internalizing an externality? How does a Pigovian tax or subsidy internalize an externality?
 
  What will be an ideal response?

Question 2

An increase in the quantity of a product supplied is caused by an increase in the price of the product.
 
  Indicate whether the statement is true or false

[lauravaras]

Answer to Question 1

Internalizing an externality refers to transferring the external benefit or cost to the producer or consumer that generates the externality. A Pigovian tax transfers a negative externality in production back to the producer, which reduces the supply of the product and results in an efficient level of output. A Pigovian subsidy transfers a positive externality in consumption back to the consumer, which increases the demand for the product and results in an efficient level of output.

Answer to Question 2

TRUE

[Bob-Dole]

Correct answers!

[lauravaras]

Great! Please up vote