1. of the six roles of government listed: a) Providing a stable institutional framework; b) Promote effective and workable competition; c) Correct for externalities; d) Ensure for economic stability and growth; e) Provide for public goods; f) Adjust for undesired market results.
Which do you believe is the most controversial? Why?
2. Say the government establishes rights to pollute so that without a pollution permit you aren't allowed to emit pollutants into the air, water, or soil. Firms are allowed to buy and sell those rights. In what way will this correct for an externality?
1. Correct for externalities is most controversial. First of all we should know what is an externality.
An externality is a spill over from an economic activity. It is often referred to as a by-product of the market mechanism (supply equals demand). Negative externalities are often viewed as examples of market failure, in other words, the market mechanism creates a level of consumption / production that is higher than society desires.
A negative externality occurs when the by-product is viewed as having a social cost. For instance, when ...
This explains the six roles of government and its implications on the economy