Multiple Choice
Which of the following is a public policy a European government could implement to address negative externalities from trade?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following public policies is most effective for governments of developing countries to address negative externalities and promote entrepreneurship?
A
Increase tariffs on imported goods to protect domestic industries
B
Implement subsidies for clean technologies and enforce regulations to reduce pollution
C
Raise taxes on small businesses to increase government revenue
D
Eliminate all government intervention and allow markets to self-regulate
Verified step by step guidance1
Step 1: Understand the concept of negative externalities, which occur when the social cost of a good or activity exceeds the private cost, leading to overproduction or overconsumption that harms third parties or the environment.
Step 2: Recognize that effective government policies to address negative externalities aim to internalize these external costs, either by discouraging harmful activities or encouraging cleaner alternatives.
Step 3: Evaluate the policy options: increasing tariffs protects domestic industries but does not directly address negative externalities; raising taxes on small businesses may hinder entrepreneurship and does not target pollution; eliminating government intervention ignores the externality problem.
Step 4: Understand why implementing subsidies for clean technologies and enforcing regulations is effective: subsidies lower the cost of adopting environmentally friendly technologies, encouraging businesses to reduce pollution, while regulations set standards that limit harmful activities.
Step 5: Conclude that combining subsidies and regulations aligns private incentives with social welfare, effectively reducing negative externalities and promoting entrepreneurship in developing countries.
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