Multiple Choice
Which term best describes a refusal to buy or use something in order to bring about change, often used as a public solution to externalities?
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7. Externalities
Public Solutions to Externalities
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?
A
Embargo
B
Pigovian tax
C
Tradable permit
D
Subsidy
Verified step by step guidance1
Step 1: Understand the concept of externalities, which are costs or benefits that affect third parties not directly involved in a transaction.
Step 2: Recognize that public solutions to externalities aim to correct market failures by either discouraging negative externalities or encouraging positive ones.
Step 3: Identify that a Pigovian tax is a tax imposed to internalize negative externalities by making the private cost equal to the social cost.
Step 4: Know that a tradable permit system allows firms to buy and sell rights to pollute, effectively limiting total pollution through market mechanisms.
Step 5: Understand that an embargo is an official ban on trade or commercial activity with a particular country, often used as a political or economic sanction rather than a direct economic instrument to correct externalities.
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