Multiple Choice
In the context of public solutions to externalities, what is the government's primary aim in setting quotas?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following situations is most likely to prompt government intervention in markets?
A
When goods are non-rival and non-excludable
B
When all market participants have perfect information
C
When negative externalities, such as pollution, affect third parties
D
When there is perfect competition and no market failures
Verified step by step guidance1
Step 1: Understand the concept of market failures, which occur when the free market does not allocate resources efficiently, leading to a loss of social welfare.
Step 2: Recognize that government intervention is typically prompted by market failures such as externalities, public goods, information asymmetries, or monopolies.
Step 3: Identify that non-rival and non-excludable goods are public goods, which can lead to free-rider problems and may require government intervention, but this is not the only or most common reason.
Step 4: Note that perfect information and perfect competition imply efficient markets with no failures, so government intervention is less likely in these cases.
Step 5: Understand that negative externalities, like pollution affecting third parties, represent a classic market failure where private costs differ from social costs, making government intervention necessary to correct the externality.
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