Multiple Choice
A key element of the Coase theorem is:
7. Externalities
Private Solutions to Externalities: The Coase Theorem
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It is possible to remedy a positive externality by:
A
Introducing a tax
B
Introducing a subsidy
C
Doing nothing because it is good to have positive externalities
D
None of the above
Verified step by step guidance1
Understand the concept of a positive externality: A positive externality occurs when a third party benefits from an economic transaction they are not directly involved in. For example, education provides benefits not only to the individual receiving it but also to society as a whole.
Identify the problem with positive externalities: The market may underproduce goods or services that generate positive externalities because the private benefits to the producer or consumer are less than the total social benefits.
Consider the role of government intervention: To encourage the production or consumption of goods with positive externalities, the government can intervene to align private incentives with social benefits.
Evaluate the options for remedying positive externalities: Introducing a subsidy is a common method to encourage more production or consumption of goods with positive externalities. A subsidy reduces the cost for producers or consumers, increasing the quantity produced or consumed to a socially optimal level.
Understand why other options are less effective: Introducing a tax would discourage production or consumption, which is counterproductive for positive externalities. Doing nothing may result in underproduction, and 'None of the above' does not address the issue.
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Private Solutions to Externalities: The Coase Theorem practice set
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