Multiple Choice
Which federal or state program provides medical care for low-income patients on public assistance?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
The government is not likely to address a positive externality using which of the following methods?
A
Providing subsidies to encourage the activity
B
Imposing a tax on the activity that generates the externality
C
Direct provision of the good or service
D
Mandating minimum levels of production or consumption
Verified step by step guidance1
Step 1: Understand what a positive externality is. A positive externality occurs when an activity provides benefits to third parties not directly involved in the activity, leading to underconsumption or underproduction from a social perspective.
Step 2: Recognize that government interventions aim to correct market failures caused by externalities. For positive externalities, the goal is to encourage more of the beneficial activity.
Step 3: Analyze each method: Providing subsidies encourages the activity by lowering its cost, which aligns with correcting positive externalities; direct provision ensures the good or service is available; mandating minimum levels forces a baseline consumption or production.
Step 4: Consider the effect of imposing a tax on the activity. Taxes increase the cost and typically discourage the activity, which is counterproductive when dealing with positive externalities.
Step 5: Conclude that the government is unlikely to use taxes to address positive externalities because taxes reduce the activity that generates the external benefit, which is the opposite of the desired effect.
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