If Only a Few People Are Affected by an Externality

question 306

Multiple Choice

If only a few people are affected by an externality, then it is likely that

• A) corrective taxes will provide the most efficient solution to the externality.
• B) command-and-control regulation will provide the most efficient solution to the externality.
• C) a private solution to the inefficiency will occur.
• D) a private solution will be very difficult to negotiate.

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Definitions:

Economic Profit

The difference between total revenue and the total opportunity costs of all resources used in production, including implicit and explicit costs.

Long-run Equilibrium Conditions

A state in an economic model where all factors of production and markets adjust, resulting in no excess supply or demand.

Price-taker

A seller or buyer that has no control to dictate prices in the market, typically because of the highly competitive and uniform nature of the product.

Competitive Price-searcher Markets

Markets where firms have some control over prices due to product differentiation, but must search for the best price to attract customers.