Multiple Choice
A localization strategy should be considered when:
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following is an example of a public solution to externalities where the government creates barriers to entry?
A
Running public awareness campaigns about the effects of externalities
B
Imposing a Pigovian tax on negative externalities
C
Issuing licenses that limit the number of firms allowed to operate in a market
D
Providing subsidies to firms that reduce pollution
Verified step by step guidance1
Understand the concept of externalities: Externalities occur when a third party is affected by the actions of others, either positively or negatively, without compensation. Negative externalities, like pollution, impose costs on society.
Recognize what a public solution to externalities means: Public solutions involve government intervention to correct market failures caused by externalities. These can include taxes, subsidies, regulations, or information campaigns.
Identify what 'creating barriers to entry' means: Barriers to entry are obstacles that make it difficult for new firms to enter a market. When the government issues licenses limiting the number of firms, it restricts market entry, which is a form of regulation.
Analyze each option in terms of whether it creates a barrier to entry: Running awareness campaigns and providing subsidies do not restrict entry; they influence behavior or costs. Imposing a Pigovian tax changes incentives but does not limit the number of firms. Issuing licenses that limit firms directly restricts entry.
Conclude that the example of a public solution involving barriers to entry is the issuance of licenses limiting the number of firms, as this is a direct government-imposed restriction on market participation.
