ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Altering incentives so that people take account of the external effects of their actions.
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External benefits
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External costs
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None of the above
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Detailed explanation-1: -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.
Detailed explanation-2: -Many, if not most transactions create external benefits – examples include: Taking a bus reduces congestion on a road, enabling other road users to travel more quickly. Buying a burglar alarm may deter possible burglars from a street or an area, which provides a benefit to other home owners.
Detailed explanation-3: -Encouraging positive externalities Government grants and subsidies to producers of goods and services that generate external benefits will reduce costs of production, and encourage more supply. This is a common remedy to encourage the supply of merit goods such as healthcare, education, and social housing.