Multiple Choice
Why do governments regulate natural monopolies?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following best describes a public solution to externalities?
A
Allowing the market to self-correct without any intervention
B
Private bargaining between affected parties without government involvement
C
Imposing price controls to regulate the market
D
Government intervention through taxes or subsidies to correct market outcomes
Verified step by step guidance1
Understand the concept of externalities: Externalities occur when a market transaction affects third parties who are not directly involved in the transaction, leading to market failure.
Recognize that a public solution to externalities involves government intervention to correct these market failures, as private markets alone may not achieve efficient outcomes.
Identify common forms of government intervention, such as imposing taxes on negative externalities (e.g., pollution taxes) or providing subsidies for positive externalities (e.g., education subsidies).
Understand that these interventions aim to internalize the externality by adjusting the private costs or benefits to reflect the social costs or benefits, leading to a more efficient market outcome.
Contrast this with other options: allowing the market to self-correct or private bargaining are private solutions, while price controls are a different form of intervention not specifically targeted at correcting externalities.
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