Explanation:

Correct Option: (d) Explanation:  All statements are correct Supplementary notes: Externalities  Externalities refers to situations when the effect of production or consumption of goods and services imposes costs or bene fi ts on others which are not re fl ected in the prices charged for the goods and services being provided.  Externalities occur in an economy when the production or consumption of a speci fi c good or service impacts a third party that is not directly related to the production or consumption of that good or service.  Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.  Pollution is an obvious example of a negative externality, also termed an external diseconomy. Chemicals dumped by an industrial plant into a lake may kill fi sh and plant life and affect the livelihood of fi shermen and farmers nearby.  In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and pro fi t opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a home owner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.  There are also positive externalities, and here the issue is the difference between private and social gains. For example, research and development (R&D) activities are widely considered to have positive effects beyond those enjoyed by the producer that funded the R&D—normally, the company that pays for the research. This is because R&D adds to the general body of knowledge, which contributes to other discoveries and developments. However, the private returns of a fi rm selling products based on its own R&D typically do not include the returns of others who bene fi ted indirectly. With positive externalities, private returns are smaller than social returns . Taxation and externalities  Neoclassical economists long ago recognized that the ineffi ciencies associated with technical externalities constitute a form of “market failure.” Private market–based decision making fails to yield effi cient outcomes from a general welfare perspective. These economists recommended government intervention to correct for the effects of externalities.  In The Economics of Welfare, British economist Arthur Pigou suggested that governments tax polluters an amount equivalent to the cost of the harm to others. Such a tax would yield the market outcome that would have prevailed with adequate internalization of all costs by polluters. By the same logic, governments should subsidize those who generate positive externalities, in the amount that others bene fi t.