Which of the following mitigation tactics could reduce the economic risk associated with negative externalities?

• A. Imposing a tax equal to the external cost
• B. Subsidizing the production of goods with negative externalities
• C. Eliminating all government intervention in the market
• D. Encouraging firms to increase output regardless of external costs

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what a negative externality is — it occurs when the production or consumption of a good imposes a cost on third parties that is not reflected in the market price.
2. Step 2: Recognize that economic risk from negative externalities arises because the market outcome leads to overproduction or overconsumption, causing social costs to exceed private costs.
3. Step 3: Identify that an effective mitigation tactic should align private costs with social costs, internalizing the externality so that producers or consumers take the external cost into account.
4. Step 4: Analyze the options: imposing a tax equal to the external cost increases the private cost to reflect the social cost, thereby reducing overproduction and economic risk.
5. Step 5: Understand why other options fail: subsidizing production encourages more negative externalities, eliminating government intervention ignores the problem, and encouraging firms to increase output worsens the externality.