Negative externalities in a market could be internalized if
a) there were a tax on the product
b) there were a subsidy on the product
c) production were stopped
d) the Coase Theorem failed
which is the correct answer? what does it mean by internalized?
In this case, internalized means that the social costs of the externality are some-how "captured" or accounted for in the final price and quantity.
I would go with a). A tax per unit on the producer that is equal to the per-unit externality cost would have the effect of internalizing the externality.
BTW, economists refer to such a tax as a Pigouvian tax (after the British Arthur Pigou)
Yes, you are correct. The correct answer is a) there were a tax on the product.
By internalizing the negative externality, it means that the costs associated with the externality are taken into account and reflected in the final price and quantity of the product. In the case of a negative externality, such as pollution, the cost of the pollution is typically not fully borne by the producer or consumer but is instead imposed on society as a whole.
By imposing a tax on the product equal to the per-unit externality cost, the negative externality can be internalized. This tax, also known as a Pigouvian tax, aims to make the producer pay for the social costs they impose on society through the negative externality. The increased cost due to the tax encourages the producer to reduce their level of production or adopt cleaner technologies to minimize the externality.
It's important to note that while a tax is one way to internalize negative externalities, other methods like regulations or tradable permits can also be employed depending on the specific situation. However, in the given options, a tax would be the most suitable method to internalize the negative externality.