Multiple Choice
Which of the following best defines 'crowding out' in the context of externalities and social costs?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is NOT an advantage of corrective taxes?
A
They can be adjusted to reflect the estimated external cost.
B
They provide an incentive for firms to reduce negative externalities.
C
They generate government revenue.
D
They eliminate the need for any government intervention in markets with externalities.
Verified step by step guidance1
Step 1: Understand what corrective taxes are. Corrective taxes, also known as Pigouvian taxes, are levied on activities that generate negative externalities to internalize the external cost into the market price.
Step 2: Identify the advantages of corrective taxes. These include: (a) the ability to be adjusted to reflect the estimated external cost, (b) providing firms with incentives to reduce negative externalities by making pollution or harmful activities more costly, and (c) generating government revenue from the tax collected.
Step 3: Analyze the statement 'They eliminate the need for any government intervention in markets with externalities.' Consider whether corrective taxes themselves are a form of government intervention or if they remove the need for further intervention.
Step 4: Recognize that corrective taxes are indeed a form of government intervention designed to correct market failures caused by externalities. Therefore, they do not eliminate the need for government intervention; rather, they are an example of it.
Step 5: Conclude that the statement 'They eliminate the need for any government intervention in markets with externalities' is NOT an advantage of corrective taxes, making it the correct answer to the problem.
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