Question

Are the following statements true, false, or uncertain? Please explain.

a. Government policies that interfere with free markets will always be inefficient and therefore decrease society’s net benefits.
b. Economic theory predicts that an increase in gas prices will cause people to drive less and therefore spend less on gasoline.
c. When government imposes a regulation that restricts pollution to a maximum quantity per firm, the policy results in a higher cost for pollution abatement than is necessary.
d. Coasian bargaining always results in the socially optimal amount of an externality, regardless of the initial assignment of property rights.

Answer 1

a. False
This is not always true. Incase of negative externality, government intervention is necessary to decrease external costs. Similarly for positive externality the government should provide subsidy to increase social benefit.

b. False
Gas is has a relatively inelastic demand, and increase in gas prices do not necessarily decrease expenditure of gasoline

c. False
The governement usually imposes a tax equal to the external cost caused by the consumption or production of the good or service.

d. True
Coasian bargaining results in a socially optimal amount of externality.

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