Microeconomics: Principles, Problems, & Policies, 20th Edition

Published by McGraw-Hill Education
ISBN 10: 0077660811
ISBN 13: 978-0-07766-081-9

Chapter 5 - Government's Role and Government Failure - Review Questions: 1

Answer

a. Reallocate resources in order to improve efficiency b. Fight negative externalities d. Provide a low-risk economic environment for individuals and firms.

Work Step by Step

a. Governments help reduce the effect of externalities by taxing the parties causing negative externalities and enjoying the benefits of positive externalities. Thus, coercive government improves efficiency and improves resource allocation b. As mentioned in the above point, the private producers causing negative externalities are taxed and are constantly monitored by the government and thus the effects of negative externalities are controlled by the coercive governments d. Government reduces the private sector risks by ensuring that only mutually agreeable transactions take place in the market and keeps a vigil on the illegal activities. Thus, government provides a low-risk economic environment for individuals and firms to make safe investments.
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