Which of the following is a reason a government might restrict trade as a public solution to externalities?

• A. To increase consumer surplus in the domestic market
• B. To encourage monopolistic competition
• C. To reduce negative externalities such as pollution caused by imported goods
• D. To eliminate all government intervention in the market

Answer: (C)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when a third party is affected by the production or consumption of a good or service, and these effects are not reflected in market prices.
2. Recognize that negative externalities, such as pollution, impose costs on society that are not accounted for by producers or consumers in the market.
3. Identify that governments may intervene in trade to address these negative externalities by restricting imports that cause harm, thereby reducing the social costs associated with those goods.
4. Evaluate the options given: increasing consumer surplus or encouraging monopolistic competition do not directly address externalities, and eliminating government intervention would not solve externality problems.
5. Conclude that the reason a government might restrict trade as a public solution to externalities is to reduce negative externalities such as pollution caused by imported goods.