ojx1326
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A society can sometimes alleviate problems caused by externalities by...

(a) having the government produce the good or service
(b) using tax revenue to subsidize the firm causing a negative externality.
(c) using government expenditures to penalize the firm causing the positive externality
(d) prohibiting the production of positive externalities.
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jpt4749
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Negative externality occurs when marginal private cost is greater than marginal social cost (like emission of toxic gas or disposal of waste by plants & factories). As such imposing (not subsidizing) tax will shift the marginal private cost up to the level of marginal social cost and quantity will reduce to socially optimal level and thus internalize the externality.

Positive externality is something that has to be encouraged (not penalized or prohibited) as marginal social benefit is greater than marginal private benefit and subsidy is needed to raise the quantity up to the socially optimal level.

According to this I think choice A seems the most correct as B & C & D truly contradicts with the theory of externality
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ojx1326
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alright Thank you Nathan, I really appreciate the help provided!
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