What is a possible corrective measure for negative externalities?

Subsidies serve as a powerful corrective measure for negative externalities by encouraging healthier production and consumption behaviors. When a market activity generates negative externalities, such as pollution or public health risks, it often does not reflect the true social costs involved. By implementing subsidies for alternative, less harmful practices, the government can effectively incentivize businesses and individuals to shift towards more socially responsible actions.

For example, if a factory produces pollution as a byproduct of its manufacturing process, providing subsidies to companies that invest in cleaner technologies can mitigate the overall negative impact on the environment. These subsidies can lower the cost of production for eco-friendly options, making them more competitive in the market, which helps align private incentives with social welfare.

Other options, such as tax exemptions and regulation relief, do not directly address the problem of negative externalities in the same way. Increased production would likely exacerbate the issue by potentially increasing the negative effects associated with that production.