How does a subsidy function in environmental economics?

A subsidy in environmental economics serves to encourage the production or consumption of environmentally friendly goods and services. By providing financial assistance or incentives, subsidies lower the effective cost for producers or consumers of goods that have a positive impact on the environment. This can lead to an increase in the adoption of renewable energy sources, sustainable agricultural practices, and products that help reduce environmental harm.

When subsidized, environmentally friendly alternatives become more competitive in the market against non-sustainable options. As a result, consumers are more likely to choose these alternatives, resulting in lower carbon emissions and a shift towards more sustainable practices.

The other options do not accurately capture the primary role of a subsidy in this context. Increasing the cost of production typically discourages production or consumption rather than encouraging it. Eliminating taxes on harmful goods does not align with the intent of subsidies, which aim to promote positive environmental outcomes. Promoting the extraction of nonrenewable resources contrasts with the goals of environmental economics, which seeks to reduce reliance on such resources.