Which of the following is an example of a public solution to externalities?

• A. Two firms negotiate a private contract to reduce noise pollution.
• B. A company moves its manufacturing operations to another country.
• C. The government imposes a tax on firms that pollute the environment.
• D. A consumer chooses to buy eco-friendly products.

Answer: (C)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when a third party is affected by the actions of others, either positively or negatively, without compensation. Negative externalities, like pollution, impose costs on society that are not reflected in market prices.
2. Identify what a public solution to externalities means: Public solutions involve government intervention or collective action to correct the market failure caused by externalities. This can include taxes, subsidies, regulations, or public provision of goods.
3. Analyze each option to determine if it represents a public or private solution: For example, private contracts between firms are private solutions, while government-imposed taxes are public solutions.
4. Recognize that a government-imposed tax on firms that pollute is a classic example of a public solution, as it internalizes the external cost by making polluters pay for the damage they cause.
5. Conclude that among the options, the government tax on polluting firms is the public solution because it involves government action to address the externality, unlike private negotiations or individual consumer choices.