Multiple Choice
Which of the following is a problem associated with pursuing a strategic trade policy?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following is a public policy strategy used to modify the market in order to address externalities?
A
Allowing markets to operate without intervention
B
Increasing consumer advertising
C
Ignoring the presence of externalities
D
Imposing taxes or subsidies
Verified step by step guidance1
Understand what an externality is: an externality occurs when a market transaction affects third parties who are not directly involved, causing either a positive or negative spillover effect.
Recognize that public policy strategies aim to correct these externalities to improve overall social welfare by aligning private incentives with social costs or benefits.
Identify common public policy tools used to address externalities, such as imposing taxes on activities that generate negative externalities (to reduce their occurrence) or providing subsidies for activities that generate positive externalities (to encourage them).
Evaluate the options given: allowing markets to operate without intervention ignores externalities, increasing consumer advertising does not directly address externalities, and ignoring externalities is not a corrective strategy.
Conclude that imposing taxes or subsidies is a direct market intervention designed to internalize externalities, making it the correct public policy strategy to modify the market.
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