When a Producer Operates in a Market Characterised by Negative

question 45

Multiple Choice

When a producer operates in a market characterised by negative production externalities, a tax that forces them to internalise the externality will:

• A)give sellers the incentive to take account of the external effects of their actions
• B)have an offsetting effect that reduces the producer's private production costs
• C)increase the amount of the commodity exchanged in market equilibrium
• D)restrict the producer's ability to take the costs of the externality into account when deciding how much to supply

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Definitions:

Externality

An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer.

Market Exchange

The process through which goods, services, or assets are traded between buyers and sellers at a determined price.

Negative Externalities

Unintended and unfavourable outcomes of an activity or transaction that affect third-party stakeholders who did not choose to be involved in that activity.

Positive Externalities

Benefits experienced by a third party not directly involved in the production or consumption of a good or service.