Use the following figure. MB and MC represent private, or individual, marginal benefits and costs. MBS represents marginal benefits to society when positive externalities are present, and MCS represents marginal costs to society when negative externalities are present.

-If a business is carrying out an action that causes society to maximize its net benefit at activity level 4, the appropriate response by government to support the interests of society would be to introduce a policy that:
A) increases taxes paid by the business.
B) encourages the business to cut back its action.
C) encourages the business to increase its action.
D) ensures that the business continue the action at its current level.

Question

Use the following figure. MB and MC represent private, or individual, marginal benefits and costs. MBS represents marginal benefits to society when positive externalities are present, and MCS represents marginal costs to society when negative externalities are present.
 
-If a business is carrying out an action that causes society to maximize its net benefit at activity level 4, the appropriate response by government to support the interests of society would be to introduce a policy that:
A) increases taxes paid by the business. 
B) encourages the business to cut back its action. 
C) encourages the business to increase its action. 
D) ensures that the business continue the action at its current level.

Quizplus · Accepted Answer

The correct answer is C because the government should encourage the business to increase its action to maximize society's net benefit.

Use the Following Figure