What is an externality? How do positive and negative externalities differ in their effects? How can government action correct positive and negative externalities?
What will be an ideal response?
An externality is a cost or benefit of an economic activity that is borne by third parties. A good generating a positive externality is underproduced and underconsumed. A good generating a negative externality is overproduced and overconsumed. The government can correct a positive externality by either producing the good itself or by providing a subsidy equal to the external benefit, and can correct a negative externality by either imposing a tax equal to the external cost or by direct regulation.
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A) 2001 B) 1993 C) 2014 D) 1984
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Indicate whether the statement is true or false
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