If the government imposes a tax on a utility equal to the cost of the damage caused by negative externalities, what is this action called?

Imposing a tax on a utility equal to the cost of the damage caused by negative externalities is referred to as internalizing the externality. This approach aims to align private costs with social costs by making the utility account for the external harm it creates. By levying a tax that reflects the cost of negative externalities, the government incentivizes the utility to reduce its negative impact on society, thereby promoting more efficient resource allocation.

When firms or utilities do not bear the full cost of their actions, they may overproduce or engage in activities that are harmful to the environment or public health. By internalizing the externality through taxation, these firms are forced to confront the true cost of their operations, leading to a correction in their behavior. This can result in a reduction of harmful activities, better environmental practices, or advancements in technology to mitigate negative impacts, ultimately benefiting society as a whole.

In essence, internalizing an externality helps create a balance where the costs incurred by the utility are reflected in its decision-making, producing outcomes that are more socially optimal.