Which policy tool is commonly used to internalize negative environmental externalities?

• A. Subsidies for pollution
• B. Regulatory delays
• C. Negotiated voluntary agreements
• D. Pigovian taxes

Answer: (D)

Internalizing negative environmental externalities means making the polluter bear the social costs of pollution, so private decisions reflect those extra costs. A Pigovian tax does exactly that. By charging a tax on each unit of pollution equal to the marginal damage the pollution causes, it raises the private cost of polluting. Firms respond by reducing emissions until the cost of further abatement equals the tax. This aligns private incentives with social welfare and helps reach a more efficient level of pollution.

Subsidies for pollution would do the opposite by encouraging more pollution. Regulatory delays hinder enforcement and reduce the regulator’s ability to curb harm. Negotiated voluntary agreements rely on cooperation and may not achieve full or enforceable internalization. The Pigovian tax provides a clear price signal that directly internalizes the external cost.