What tradeoff does society experience when reducing the size of a negative externality?

• A. Increased government spending
• B. Activity becomes unpredictable
• C. No change in activity
• D. Less economic activity occurs

Answer: (D)

Reducing a negative externality usually means making the activity that causes harm more costly or restricted. Those measures raise the private cost of engaging in that activity or limit how much of it can be done, so producers and consumers respond by reducing the level of the activity. As a result, overall economic activity tends to fall even though the external harm is decreased. In this sense, the tradeoff is between achieving cleaner outcomes and maintaining the same level of production or consumption.