Answered: Analyze the role of the government with…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Analyze the role of the government with an exteranlity present

Expert Solution

Step 1

There are two types of externalities present:

Positive externality
Negative externality

Positive externality and the government:

Government can encourage positive externality through subsidies for those goods that result in spillover benefit. Providing subsidies gives incentives to firms to increase production of those goods that result in positive externalities. Generally, spillover benefits imparts into the society, subsidies by the government are a path for the society to share the cost of positive externalities. Subsidies are funded by the tax paid by the society. If education is considered, public education is subsidized; a large part of education reaps the spillover benefits.

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