When pollution (a negative externality) is created by firms, which of the following is not a valid way for the government to restore the social optimum? a

Marketing Dec 25, 2020

When pollution (a negative externality) is created by firms, which of the following is not a valid way for the government to restore the social optimum?

a. require firms to install pollution-abatement equipment

b. require firms to change production techniques to reduce emissions

c. levy a tax on the production of the good

d. require firms to pay for the environmental damage they create

e. offer a subsidy to firms to reduce their production costs

Expert Solution

Option E (offer a subsidy to firms to reduce their production costs) is the correct answer.

The subsidy for the firms to reduce the production costs of the firm will induce the firms to produce even more and more goods, which will eventually increase the pollution which is the negative externality instead of reducing it.

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