When the government intervenes in markets with externalities, it does so in order to
A)increase production when negative externalities are present.
B)protect the interests of bystanders.
C)make certain all benefits are received by market participants.
D)reduce production when positive externalities are present.

Question

Quizplus · Accepted Answer

When there are externalities, the market is unable to account for the costs or benefits that spill over to third parties. In such cases, the government intervenes to protect the interests of bystanders and ensure that the costs of negative externalities or benefits of positive externalities are taken into account. The other options are incorrect as the government's intervention is aimed at correcting the market failure caused by externalities, not to increase or decrease production or ensure market participants receive all benefits.

When the Government Intervenes in Markets with Externalities, It Does