When the government can set emissions standards for polluting industries, the government should not set emissions standards because the market equilibrium will coincide with the social optimum in the absence of intervention.

Question

Quizplus · Accepted Answer

In the presence of externalities, such as pollution, the market equilibrium will not coincide with the social optimum, as the market only considers private costs and benefits, while the social cost also includes negative effects on third parties. Therefore, setting emissions standards is necessary to internalize the externality and achieve a socially desirable outcome. The statement is incorrect because in the absence of government intervention, polluting industries may not take into account the negative externalities their emissions impose on society. As a result, the market may not reach the socially optimal level of emissions, and government intervention may be necessary to correct this market failure.

When the Government Can Set Emissions Standards for Polluting Industries