When the government intervenes in markets with external costs, it does so in order to:
A) protect the interests of bystanders.
B) ensure all the costs are born by producers.
C) ensure all the costs are born by consumers.
D) increase the welfare losses of producers.

Question

Quizplus · Accepted Answer

The government intervenes in markets with external costs to protect the interests of bystanders who may suffer negative consequences from the market activity. External costs are costs that are incurred by people who are not directly involved in the market transaction, such as pollution or noise. Without government intervention, these costs are not taken into account by producers or consumers and therefore can lead to market inefficiencies and negative externalities.

When the Government Intervenes in Markets with External Costs, It