Beginning from a situation where there were no clear property rights to clean air and water:
A)subsidies could not improve efficiency in cases of external benefits.
B)subsidies could not improve efficiency in cases of external costs.
C)taxes could not improve efficiency in cases of external costs.
D)neither external benefits nor external costs could improve efficiency in either the case of external benefits or the case of external costs.

Question

Beginning from a situation where there were no clear property rights to clean air and water:
A)​subsidies could not improve efficiency in cases of external benefits.
B)​subsidies could not improve efficiency in cases of external costs.
C)​taxes could not improve efficiency in cases of external costs.
D)​neither external benefits nor external costs could improve efficiency in either the case of external benefits or the case of external costs.

Quizplus · Accepted Answer

Subsidies could only improve efficiency in cases of external benefits, not in cases of external costs. In the absence of clear property rights to clean air and water, economic agents do not bear the full cost of their actions, which could lead to overconsumption of polluting activities. The government could use taxes to internalize these external costs and improve efficiency, but subsidies would not be effective in this case.

Beginning from a Situation Where There Were No Clear Property