Multiple Choice
If a home country wants to limit outward foreign direct investment (FDI) flow, which policy should the country implement?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following is NOT an argument for government intervention in the presence of externalities?
A
To correct market failures caused by externalities
B
To ensure efficient allocation of resources
C
To protect public health and the environment
D
To increase the profits of private firms
Verified step by step guidance1
Step 1: Understand what externalities are. Externalities occur when a third party is affected by the actions of others, either positively or negatively, and these effects are not reflected in market prices.
Step 2: Recognize that government intervention is typically justified to correct market failures caused by externalities, aiming to achieve a more efficient allocation of resources.
Step 3: Identify common reasons for government intervention, such as protecting public health and the environment, which are often impacted by externalities.
Step 4: Analyze the given options and note that increasing the profits of private firms is not a standard argument for government intervention related to externalities, as government actions usually focus on social welfare rather than private profits.
Step 5: Conclude that the option 'To increase the profits of private firms' is NOT an argument for government intervention in the presence of externalities.
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