Which method is used to regulate externalities?

The method of taxation or tariffs is a primary approach to regulating externalities, which are costs or benefits that affect third parties who are not directly involved in a transaction. For instance, when a factory emits pollution, this creates negative externalities that can impact public health and the environment. By imposing taxes on activities that generate negative externalities, it incentivizes businesses to reduce their harmful behavior, as they will want to avoid the financial burden of these taxes.

Taxes can effectively reflect the social costs of negative externalities, encouraging firms to adopt cleaner technologies or practices to minimize their tax exposure. Conversely, subsidies can be used in cases of positive externalities, encouraging behaviors that add societal value.

In contrast, promoting competition among businesses does not directly address the presence of externalities. While competition may lead to better products or prices, it doesn't inherently correct market failures caused by externalities. Enhancing marketing strategies is focused on improving businesses' outreach and sales rather than resolving the effects of external costs or benefits. Eliminating consumer choice would not be a feasible or ethical method to regulate externalities. Instead, it would likely exacerbate market failures and limit the ability of consumers to make informed decisions based on their preferences and needs.