When a Market Is Characterized by an Externality, the Government

question 392

Multiple Choice

When a market is characterized by an externality, the government

• A)can correct the market failure only in the case of positive externalities.
• B)can correct the market failure only in the case of negative externalities.
• C)can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality.
• D)cannot correct for externalities due to the existence of patents.

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Definitions:

Financial Break-even

The point at which total revenues are equal to total operating expenses and financial costs, meaning the company makes no profit but also incurs no loss.

Payback Period

The amount of time required for an investment to generate cash flows to recover its initial cost.

Fixed Costs

Fixed costs are business expenses that remain constant regardless of the level of production or sales activity, such as rent, salaries, and insurance.

Operating Cash Flow

The cash a company generates from its normal business operations, excluding financing and investing activities.