If production of a good gives rise to a negative externality, it can be internalized by?

When the production of a good leads to a negative externality, it means that the social costs of producing that good exceed the private costs faced by the producers. This discrepancy can result in overproduction of the good from a societal perspective, as producers do not bear the full cost of their production decisions, which can lead to negative effects on third parties, such as pollution or resource depletion.

To internalize this negative externality, one effective approach is to impose a tax on the producers corresponding to the external cost associated with their production. This tax serves to align the private costs of production with the true social costs. By doing so, the tax incentivizes producers to reduce output to a level that is more socially optimal, thereby alleviating the negative externality.

Thus, by taxing the producers, the government can correct the market failure created by the negative externality, leading to a more efficient allocation of resources and mitigating the harm done to third parties. This intervention helps to ensure that the cost of the externality is taken into account in the producers' decision-making process, promoting a more socially beneficial outcome.