Good X is a widely bought product whose consumption creates a negative externality. Good Y is a costlier substitute for X that produces fewer negative externalities when consumed. The government wants to cut consumption of good X substantially, but it does not want its budget deficit to rise. Under which circumstances is the government most likely to achieve this aim?
- AGovernment taxes producers of good X; price elasticity of demand for good X < 1; government subsidises producers of good Y? no; price elasticity of demand for good Y > 1
- BTax X; price elasticity X < 1; subsidise Y; price elasticity Y < 1
- CTax X; price elasticity X > 1; do not subsidise Y; price elasticity Y > 1
- DDo not tax X; price elasticity X > 1; subsidise Y; price elasticity Y > 1