Multiple Choice
Which of the following best describes an official ban on trade or other commercial activity with a particular country as a public solution to externalities?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Why do economists generally support the Trade Adjustment Assistance Act as a public solution to externalities?
A
It imposes tariffs on imported goods to protect domestic industries from foreign competition.
B
It helps workers displaced by trade adapt to new industries, reducing negative externalities from unemployment.
C
It provides subsidies to exporters to increase international competitiveness.
D
It eliminates all government intervention in markets affected by trade.
Verified step by step guidance1
Understand the concept of externalities: Externalities occur when the actions of individuals or firms have unintended side effects on others that are not reflected in market prices. Negative externalities, such as unemployment caused by trade displacement, can lead to social costs.
Recognize the role of the Trade Adjustment Assistance (TAA) Act: The TAA Act is designed to help workers who lose their jobs due to international trade by providing retraining, income support, and job search assistance, which helps mitigate the negative social impacts (externalities) of trade.
Analyze why tariffs are not the preferred solution: While tariffs protect domestic industries by raising the cost of imports, they can lead to inefficiencies and higher prices for consumers, and do not directly address the problem of displaced workers or the external costs of unemployment.
Understand why subsidies to exporters or eliminating government intervention are not ideal: Subsidies may distort markets and do not address worker displacement, while eliminating intervention ignores the social costs of unemployment and adjustment difficulties faced by workers.
Conclude that economists support the TAA because it targets the negative externality (unemployment due to trade) by helping workers adapt, thus improving overall economic efficiency and social welfare without distorting trade as tariffs or subsidies might.
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