Which strategy may help reduce externalities in a market?

Implementing subsidies to suppliers can be an effective strategy for reducing externalities in a market, particularly negative externalities. Externalities occur when the costs or benefits of a market activity affect third parties who are not directly involved in the transaction, leading to outcomes that may not be optimal for society as a whole.

When subsidies are provided to suppliers, they can lower the cost of production for goods or services that generate positive externalities or encourage less harmful practices in industries that create negative externalities. For instance, subsidies for renewable energy sources or environmentally friendly practices can incentivize producers to increase their output of low-emission products, thus reducing pollution and its associated social costs.

Subsidies can effectively align private incentives with social welfare by making it financially feasible for suppliers to adopt more sustainable practices or enhance their production of socially beneficial goods. This leads to an increased supply of products that help mitigate overall negative impacts on society.

Additionally, subsidies can stimulate innovation and the development of cleaner technologies, further facilitating a transition towards more sustainable market practices. By supporting suppliers financially, the strategy becomes an instrumental part of addressing externalities and fostering a more favorable economic environment for both producers and consumers alike.