Governments often use taxation and/or regulation to compensate for or eliminate the social cost when the sale or consumption of products may benefit or harm other people who are not involved in the transaction and did pay for the product.Which fundamental assumption of a market-driven society does this practice relate to?

Question

Quizplus · Accepted Answer

The use of taxation and regulation to eliminate social costs relates to the assumption of the absence of externalities, which means that the market does not account for the costs or benefits imposed on third parties outside of a transaction. In this case, the social cost is the cost to others who are not involved in the transaction, which is not accounted for in the market price. By using taxation and regulation, the government aims to internalize these external costs and improve market efficiency.

Governments Often Use Taxation And/or Regulation to Compensate for or Eliminate