To Ensure an Efficient Equilibrium Outcome When External Costs Are

question 213

Multiple Choice

To ensure an efficient equilibrium outcome when external costs are present in the market, the government could:
I. implement a tax equal to the level of the external cost.
II. create a system of tradable allowances to reduce output to the efficient quantity.
III. institute command and control policies to reduce output to the efficient quantity.

• A) I and II only
• B) II and III only
• C) II only
• D) I, II, and III

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Definitions:

Political Risk

The potential loss in value of a foreign investment due to instability and political changes in the host country.

Foreign Investment

Capital investment made by one country into businesses or assets in another country.

Common European Currency

The euro (€) is the currency adopted by many European Union countries, facilitating economic transactions across member states.

Lower Inflation Rates

Lower inflation rates refer to a situation where there is a slow rate of increase in the general level of prices for goods and services, which can indicate a stable economic environment.