Answered: Analyze the role of the government with…

Economics Today and Tomorrow, Student Edition

1st Edition

ISBN:9780078747663

Author:McGraw-Hill

Publisher:McGraw-Hill

Chapter16: Government Spends, Collects, And Owes

Section: Chapter Questions

Problem 13AA

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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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