Multiple Choice
Which of the following policies is most effective in addressing the overallocation of resources caused by negative externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following are the main categories of market-oriented approaches to pollution control?
A
Direct government provision and voluntary agreements
B
Command-and-control regulations and subsidies
C
Tradable permits and pollution taxes
D
Price ceilings and quotas
Verified step by step guidance1
Understand that market-oriented approaches to pollution control use economic incentives to encourage firms and individuals to reduce pollution rather than relying on direct regulations.
Identify the main types of market-oriented instruments: these typically include pollution taxes (also called Pigouvian taxes) and tradable permits (also known as cap-and-trade systems).
Recall that pollution taxes impose a cost per unit of pollution emitted, motivating firms to reduce emissions to save money, while tradable permits set a cap on total pollution and allow firms to buy and sell emission allowances.
Recognize that other options like command-and-control regulations, direct government provision, voluntary agreements, price ceilings, and quotas are either regulatory or non-market approaches, not market-oriented.
Conclude that the main categories of market-oriented approaches to pollution control are tradable permits and pollution taxes.
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