Multiple Choice
Which of the following customer needs is most likely to increase the implied uncertainty of demand in the presence of externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is a type of control that relies on economic forces to address externalities?
A
Establishing a government agency to monitor pollution
B
Mandating the use of specific pollution-control technology
C
Imposing a tax on pollution
D
Setting strict legal limits on emissions
Verified step by step guidance1
Understand the concept of externalities: Externalities occur when a third party is affected by the actions of others, such as pollution affecting people who are not involved in the production or consumption of a good.
Recognize the types of controls used to address externalities: These include command-and-control regulations (like setting legal limits or mandating technology) and economic instruments (like taxes or subsidies).
Identify command-and-control approaches: These involve direct regulations such as establishing government agencies to monitor pollution, mandating specific pollution-control technologies, or setting strict legal limits on emissions.
Understand economic instruments: These rely on market-based incentives to influence behavior, such as imposing a tax on pollution, which makes polluting more costly and encourages firms to reduce emissions voluntarily.
Conclude that imposing a tax on pollution is a type of control that uses economic forces (market incentives) to address externalities, unlike the other options which are regulatory or command-and-control methods.
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