The government can both set the efficient level of output in a market and maximize surplus by correcting for a negative externality by using:
A)a tradable allowance.
B)a tariff.
C)a subsidy.
D)a quota.

Question

Quizplus · Accepted Answer

A tradable allowance, also known as cap and trade, is the most efficient way for the government to address negative externalities. This system sets a limit on the total amount of pollution allowed in a given industry and then issues permits to firms that allow them to emit a certain amount. Firms can then buy or sell the permits amongst themselves as needed, creating a market incentive to reduce emissions. By setting the limit on pollution and allowing the market to allocate the permits, the government can ensure that the optimal level of pollution reduction is achieved while also maximizing the surplus. Tariffs, subsidies, and quotas are not as effective in addressing negative externalities and can often lead to inefficiencies and distortions in the market.

The Government Can Both Set the Efficient Level of Output