Question

Markets usually allocate resources in a manner that creates the greatest net benefit to society. An efficient allocation is one that maximizes the net benefits to society. Indicate whether each of the following statements is true or false, and explain your answer.
A. Markets sometimes fail to allocate resources efficiently. Under such circumstances, it always makes sense for the government to impose taxes in the case of negative externalities or subsidies in the case of positive externalities.
B. A negative externality exists when a voluntary market transaction between two parties imposes involuntary costs on a third party.
C. Efficiency mandates that the prices of goods and services reflects all incremental costs of production, including the cost of inputs, the value of producer time and effort, and any spillover effects.
D. With a Pigou tax, the costs that pollution imposes on the public will be considered when the firm decides where to locate a plant, which technologies to use, or how much to produce.
E. In all cases, the best remedy for externalities is to define property rights and allow the affected parties to transact privately to achieve mutually beneficial outcomes.



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  • CreatedFebruary 13, 2015
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