Please explain option b and c and why the answer is b. 4. which of the following
ID: 1116589 • Letter: P
Question
Please explain option b and c and why the answer is b.
4. which of the following statements is not correct (5%) (A Patents help internalize the externalities associated with technological advances. (B) Economists typically prefer regulations to corrective taxes because regulations provide more incentives for firms to seek continued reductions in pollution. (C) Allowing firms to trade pollution permits will lower the total cost of reducing pollution. (D) A big impediment to implementing the Coase theorem in many cases is high transactions costs 5. In a public goods context, it is difficult to measure impact on real income because (596) (A) public goods are generally free to the public. (B) they make up a small percentage of total GDPExplanation / Answer
4. B) A negative externality is the cost that a party bears due to the actions of another party. In economic terms, suppose a firm causes air pollution during its manufacturing process, this will affect the well-being of the people round the firm. This is a negative externality caused by the firm.
Corrective taxes are the taxes imposed by the government on firms that create negative externalities.
Regulations imposed on a firm increase the per-unit cost of the firms. This causes the supply curve to shift to the left which is not a profitable situation for a firm as it reduces sales.
This is why corrective taxes are preferred by frms over regulatons as it can reduce the externality at a lower cost. The firms can employ better technologies to reduce the externality at the manufacturing level itself instead of paying a per-unit cost later on.
So, the statement that economists prefer regulations over corrective taxes as regulations provide better incentives to firms is incorrect.
4. C. Pollution permits are permits given by the government to the firms in the economy allowing them to pollute to a certain pre-decided level. The firms are then allowed to buy or sell these legal documents.
If a firm pollutes less, it can sell its excess permit to another firm and hence gain money. On the other hand, if a firm pollutes more then it has to buy these permits from another firm. This will increase the overall cost of prodcution of the said firm as they have to pay the amount for the permit in addition to the production costs.
So, these permits act as external costs to the firm and deter them from polluting as they do not want to spend more than the productions costs.
Hence, the statement that allowing firms to trade pollution permits will lower the total cost of reducing pollution is correct.
So, for question 4, B is correct option as the statement that economists prefer regulations over corrective taxes as regulations provide better incentives to firms is incorrect.