Multiple Choice
Which aspect of the PESTEL model is most directly relevant when governments design public solutions to externalities such as pollution?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
What is the primary purpose of establishing economic sanctions as a public solution to externalities?
A
To ensure that all goods are provided by the government
B
To eliminate all market competition
C
To subsidize firms that produce positive externalities
D
To discourage activities that generate negative externalities by increasing their cost
Verified step by step guidance1
Understand the concept of externalities: Externalities occur when a third party is affected by the production or consumption of a good or service, without this effect being reflected in market prices.
Recognize the difference between positive and negative externalities: Positive externalities benefit third parties, while negative externalities impose costs on them.
Identify the role of economic sanctions as a public solution: Economic sanctions are designed to internalize the external costs by making the party responsible for the negative externality bear the cost.
Formulate the purpose of sanctions: By increasing the cost of activities that generate negative externalities, sanctions discourage such activities and reduce their occurrence.
Conclude that economic sanctions do not aim to eliminate market competition or ensure government provision of all goods, but specifically to correct market failures caused by negative externalities.
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