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Taxation and Deadweight Loss
easy

Taxation aimed at correcting negative externalities is to market efficiency as A: government regulation is to economic stability. What is C?

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Choose the Best Answer

A

Taxation is to deadweight loss

B

Subsidies are to market surplus

C

Price controls are to market fluctuations

D

Trade barriers are to international relations

Understanding the Answer

Let's break down why this is correct

Answer

Taxation aimed at correcting negative externalities helps improve market efficiency by making sure that the costs of harmful activities are reflected in the prices of goods and services. For example, if a factory pollutes the air, a tax on its emissions encourages the factory to reduce pollution, leading to a healthier environment and better resource allocation. In this analogy, just as taxation corrects inefficiencies caused by negative externalities, government regulation aims to ensure economic stability by setting rules that prevent market failures. Therefore, option C could be "government intervention," as it plays a similar role in managing and balancing the economy. Both taxation and regulation are tools used to guide markets toward more favorable outcomes for society.

Detailed Explanation

When taxes are used to fix problems like pollution, they can create deadweight loss. Other options are incorrect because Some think subsidies always help markets; Price controls are often seen as a way to stabilize prices.

Key Concepts

Taxation and Deadweight Loss
Market Efficiency
Government Intervention
Topic

Taxation and Deadweight Loss

Difficulty

easy level question

Cognitive Level

understand

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