In the context of public solutions to externalities, what is it called when the government controls business behavior through rules or laws?

• A. Regulation
• B. Privatization
• C. Taxation
• D. Subsidization

Answer: (A)

Verified step by step guidance

1. Understand that externalities occur when a third party is affected by the actions of others, leading to market failure.
2. Recognize that governments can address externalities through various public solutions, including taxes, subsidies, privatization, and regulations.
3. Identify that when the government directly controls business behavior by imposing rules or laws, this approach is known as regulation.
4. Note that regulation involves setting legal limits or requirements to correct negative externalities or promote positive ones.
5. Distinguish regulation from other solutions: taxation imposes costs, subsidization provides financial support, and privatization transfers ownership to private entities.