In the context of public solutions to externalities, what does 'regulation' refer to in an economic system?

• A. The establishment of private property rights to internalize externalities.
• B. The imposition of rules or laws by the government to control or correct market outcomes, such as limiting pollution levels.
• C. The use of subsidies to encourage firms to produce more goods that generate positive externalities.
• D. The voluntary agreement among firms to reduce negative externalities without government intervention.

Answer: (B)

Verified step by step guidance

1. Understand that in microeconomics, externalities occur when a third party is affected by the actions of others, leading to market outcomes that are not socially optimal.
2. Recognize that public solutions to externalities aim to correct these market failures to improve overall welfare.
3. Identify that 'regulation' specifically refers to government intervention through the imposition of rules or laws designed to control or correct market outcomes.
4. Note that such regulations can include limits on pollution levels, safety standards, or other restrictions intended to reduce negative externalities.
5. Distinguish regulation from other solutions like establishing private property rights, subsidies, or voluntary agreements, which are different mechanisms to address externalities.