Multiple Choice
Which of the following public policies is most effective for governments of developing countries to address negative externalities and promote entrepreneurship?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following public solutions can act as a buffer against unemployment caused by negative externalities?
A
Government provision of unemployment insurance
B
Establishing tradable pollution permits
C
Subsidizing the production of goods with positive externalities
D
Imposing a Pigovian tax on polluters
Verified step by step guidance1
Step 1: Understand the nature of the problem. Negative externalities are costs imposed on third parties, such as pollution, which can lead to market inefficiencies and potentially affect employment levels.
Step 2: Identify how negative externalities might cause unemployment. For example, pollution regulations or taxes might increase production costs, leading firms to reduce output and lay off workers.
Step 3: Review each public solution and analyze its direct impact on unemployment: Government provision of unemployment insurance provides financial support to unemployed workers, acting as a buffer against income loss during joblessness.
Step 4: Consider the other options: Establishing tradable pollution permits and imposing Pigovian taxes aim to reduce negative externalities but do not directly support unemployed workers; subsidizing goods with positive externalities encourages production but does not directly address unemployment caused by negative externalities.
Step 5: Conclude that among the options, government provision of unemployment insurance is the public solution that directly acts as a buffer against unemployment caused by negative externalities by supporting workers during periods of job loss.
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