ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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taxing the producer of the good
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setting a price ceiling to encourage production of the good
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subsidizing the producer of the good
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prosecuting firms that produce the good without proper permits
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Detailed explanation-1: -A negative externality exists when the production or consumption of a product results in a cost to a third party. Air and noise pollution are commonly cited examples of negative externalities.
Detailed explanation-2: -If no negative externalities were present, output would settle at OQ, and allocative efficiency would be achieved. However, the dumping of waste into a river imposes an external cost on society as a whole, for which the firm would not have to pay.
Detailed explanation-3: -When a positive externality is present, the market produces less than the socially optimal quantity of the good or service, since there is a benefit to society that is not captured by the individual.
Detailed explanation-4: -A positive externality exists when a benefit spills over to a third-party. Government can discourage negative externalities by taxing goods and services that generate spillover costs. Government can encourage positive externalities by subsidizing goods and services that generate spillover benefits.