Multiple Choice
If the assumptions of the Coase theorem are satisfied, then
7. Externalities
Private Solutions to Externalities: The Coase Theorem
Struggling with Macroeconomics?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following is not a way of dealing with externalities?
A
Internalization
B
Raising taxes
C
Increasing competition
D
Creating an additional market
Verified step by step guidance1
Understand the concept of externalities: Externalities are costs or benefits that affect third parties who are not involved in the economic transaction. They can be positive or negative.
Identify methods to address externalities: Common methods include internalization, taxation, and creating additional markets. These methods aim to align private incentives with social welfare.
Explain internalization: This involves adjusting incentives so that individuals or firms take into account the external costs or benefits of their actions. For example, a company might be required to pay for pollution it causes.
Discuss raising taxes: Governments can impose taxes on activities that generate negative externalities, such as pollution, to reduce their occurrence. This is known as a Pigovian tax.
Clarify why increasing competition is not a method: Increasing competition typically addresses market power issues rather than externalities. It does not directly deal with the costs or benefits imposed on third parties.
Related Videos
Related Practice
Private Solutions to Externalities: The Coase Theorem practice set
Problem sets built by lead tutorsExpert video explanations