Voluntary Agreements May Not Be a Feasible Method to Internalize

question 121

Multiple Choice

Voluntary agreements may not be a feasible method to internalize an externality when

• A) the dollar value of the externality is large.
• B) the externality is negative rather than positive.
• C) there are significant transaction costs.
• D) there are high taxes on the firms that cause the externalities.

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Definitions:

Inflation Tax

The revenue the government raises by creating money

Deadweight Loss

The fall in total surplus that results from a market distortion, such as a tax.

Money-Supply Growth Rate

The rate at which the amount of money available in an economy grows, impacting inflation and economic activity.

Hyperinflations

denotes extremely high and typically accelerating inflation rates, often resulting in the rapid erosion of the real value of the local currency.