Multiple Choice
An extraordinarily small crop of farm products due to drought causes which of the following effects in the market?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
A shadow economy is in evidence when:
A
all social costs and benefits are fully accounted for in market transactions
B
economic activities are conducted outside of government regulation and taxation
C
the government provides subsidies to encourage legal business operations
D
externalities are internalized through Pigovian taxes
Verified step by step guidance1
Step 1: Understand the concept of a shadow economy. A shadow economy refers to economic activities that are not reported to the government and therefore escape regulation, taxation, and official statistics.
Step 2: Recognize that when all social costs and benefits are fully accounted for in market transactions, the economy is considered 'formal' or 'regulated,' not shadow.
Step 3: Note that government subsidies to encourage legal business operations are part of formal economic policy and do not describe a shadow economy.
Step 4: Understand that internalizing externalities through Pigovian taxes is a method to correct market failures within the formal economy, not an indicator of a shadow economy.
Step 5: Conclude that the defining characteristic of a shadow economy is economic activities conducted outside government regulation and taxation, which means these activities are hidden from official oversight.
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