Question

The Kentucky government approves tax incentives to encourage more industry to move to the state. Which of the following statements best describes a potential negative externality? (1 point)

a
Development results in reduction of green space.

b
Taxes for local road maintenance decrease.

c
The state gambling industry fails to fund education.

d
The state park system loses positive media coverage.

Answer 1

a

Step-by-step explanation:

A good has positive externality if the benefits to third parties not involved in production is greater than the cost. an example of an activity that generates positive externality is research and development. Due to the high cost of R & D, they are usually under-produced. Government can encourage the production of activities that generate positive externality by granting subsidies.

A good has negative externality if the costs to third parties not involved in production is greater than the benefits. an example of an activity that generates negative externality is pollution. Pollution can be generated at little or no cost, so they are usually overproduced. Government can discourage the production of activities that generate negative externality by taxation. Taxation increases the cost of production and therefore discourages overproduction. Tax levied on externality is known as Pigouvian tax.

Government can regulate the amount of externality produced by placing an upper limit on the amount of negative externality permissible