A liability rule:
A) involves the use of taxes or fees to remedy negative externalities.
B) involves the use of subsidies to remedy negative externalities.
C) is a legal principle requiring a party who takes an action that harms others to compensate the affected parties for some or all of their losses.
D) requires that victims of an externality pay a tax to the producers of the externality.

Question

Quizplus · Accepted Answer

A liability rule is a legal principle that holds a party responsible for their actions that cause harm to others. The responsible party must compensate the affected parties for the losses incurred. It is a way to internalize the external costs of an activity by making the party responsible for the harm they cause. It differs from taxes or fees, which are meant to discourage or reduce the harmful activity in the first place. Subsidies, on the other hand, encourage the activity by providing financial incentives to the producers. Option D is incorrect because it implies that the victims of an externality would have to pay for the harm caused by someone else, which is not the case with a liability rule.

A Liability Rule