Which method is used to regulate externalities in the market?

Taxation or tariffs are frequently used to regulate externalities in the market because they create a financial incentive to discourage behaviors that lead to negative externalities, such as pollution. By imposing taxes on activities that have harmful effects on society or the environment, the government can align private costs with social costs. This encourages businesses and individuals to reduce harmful activities, thereby improving overall social welfare.

In contrast, encouraging higher wages, increased advertising, and allowing price wars do not directly address the issue of externalities. Higher wages might improve workers' standard of living but do not influence negative externalities. Increased advertising focuses on promoting products rather than mitigating the adverse effects created by market activities. Price wars might lead to lower prices for consumers but can result in profit loss for businesses and fail to address any social or environmental concerns resulting from the market's behavior. Thus, taxation stands out as a targeted approach for managing externalities effectively.