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: Introducing a tax would discourage production or consumption, which is not suitable for positive externalities. Doing nothing might lead to underproduction. Introducing a subsidy can encourage more production or consumption by reducing costs or increasing benefits for producers or consumers.
Conclude with the appropriate remedy: Introducing a subsidy is the correct approach to remedy a positive externality, as it helps to increase the production or consumption of the good or service to a socially optimal level.
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