Do you agree with imposing taxes on products imposing negative externalities and providing subsidies for products...

Do you agree with imposing taxes on products imposing negative externalities and providing subsidies for products providing positive externalities?

What other options are there to correct the market failure caused by externalities?

Expert Solution

Yes, I agree with imposing taxes on products imposing negative externalities and providing subsidies for products providing positive externalities because the main aim of imposing taxes on negative externalities have the sole motive that consumers / producers pay the full social cost of the good. The imposition of tax diminishes consumption whereas it creates a more socially efficient outcome. Take an example of a good having a negative externality and without tax there will be over-consumption of it.

General public is encouraged to drive less in case If public transport is subsidised, while as negative externalities are reduced. Subsidization is also beneficial in case of goods with positive externalities as they are under-consumption and subsidization will increase the same.

Other options to correct the market failure caused by externalities are by enacting restrictive trade practice legislation, anti-monopoly laws, and by price regulation.

Rahul Sunny answered 2 years ago

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