Multiple Choice
Which of the following is an advantage of government policies such as a carbon tax?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following is a political reason for governments to intervene in markets to address externalities?
A
To achieve allocative efficiency in resource distribution
B
To maximize total social welfare through Pigovian taxes
C
To correct market failures caused by imperfect information
D
To respond to public demand for action on issues like pollution
Verified step by step guidance1
Understand that externalities are costs or benefits of a market activity experienced by third parties, leading to market failure if unaddressed.
Recognize that governments intervene in markets for various reasons, including economic efficiency, correcting market failures, and political motivations.
Identify that economic reasons focus on improving allocative efficiency or maximizing social welfare, often through tools like Pigovian taxes.
Note that political reasons involve responding to public pressure or demand, such as addressing pollution concerns raised by citizens or interest groups.
Conclude that the political reason for government intervention is to respond to public demand for action on issues like pollution, which may not always align directly with economic efficiency goals.
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