Governments may successfully intervene in competitive markets in order to achieve economic efficiency:
A) at no time; competitive markets are always efficient without government intervention.
B) to increase the incidence of positive externalities.
C) in cases of positive externalities only.
D) in cases of negative externalities only.
E) in cases of both positive and negative externalities.

Question

Quizplus · Accepted Answer

Governments may intervene in competitive markets to address both positive and negative externalities. In the case of positive externalities, such as education or vaccination programs, the market may under-supply these goods as they generate benefits to society beyond just the individuals consuming them. Therefore, the government may subsidize or fund these programs to increase their provision. In the case of negative externalities, such as pollution or traffic congestion, the market may over-produce these goods as the costs to society are not fully accounted. Therefore, the government may regulate or tax these activities to reduce their negative impact on society. Addressing both positive and negative externalities can lead to a more efficient allocation of resources in the economy.

Governments May Successfully Intervene in Competitive Markets in Order to Achieve