Good X is a popular product that creates a negative externality when it is consumed. Good Y is a more expensive substitute for X with fewer negative externalities when consumed. The government wants to reduce the consumption of good X significantly but it does not wish to increase its budget deficit. Under which circumstances is the government most likely to meet its aim? government taxes producers of good X price elasticity of demand for good Y price elasticity of demand for government subsidises good X producers of good Y A <1 X >1 B <1 <1 C ✓ >1 X >1 D X >1 >1

1. (a)Good X is a popular product that creates a negative externality when it is consumed. Good Y is a more expensive substitute for X with fewer negative externalities when consumed. The government wants to reduce the consumption of good X significantly but it does not wish to increase its budget deficit. Under which circumstances is the government most likely to meet its aim? government taxes producers of good X price elasticity of demand for good Y price elasticity of demand for government subsidises good X producers of good Y A <1 X >1 B <1 <1 C ✓ >1 X >1 D X >1 >1[1]