Multiple Choice
The government is not likely to address a positive externality using which of the following methods?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following best describes how government intervention can address the externalities associated with genetically engineered products in the economy and society?
A
By banning all genetically engineered products to eliminate any potential externalities.
B
By imposing taxes or regulations to internalize negative externalities such as environmental risks.
C
By allowing the market to operate freely without any intervention, assuming all costs and benefits are reflected in prices.
D
By subsidizing all genetically engineered products regardless of their impact on society.
Verified step by step guidance1
Step 1: Understand the concept of externalities, which are costs or benefits that affect third parties not directly involved in a transaction. In this case, genetically engineered products may have negative externalities like environmental risks.
Step 2: Recognize that government intervention aims to 'internalize' these externalities, meaning it tries to make the private costs or benefits reflect the true social costs or benefits.
Step 3: Identify the common government tools for internalizing negative externalities, such as imposing taxes (Pigovian taxes) or regulations that increase the cost of producing or using the product to account for its external harm.
Step 4: Evaluate why banning all genetically engineered products might be too extreme and why allowing the market to operate freely might ignore external costs, leading to market failure.
Step 5: Understand that subsidizing all genetically engineered products regardless of their impact could encourage overproduction and worsen negative externalities, so targeted taxes or regulations are more effective.
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