Which of the following public policies addressing externalities would most likely foster entrepreneurship?

• A. Providing subsidies for research and development activities
• B. Increasing taxes on innovative startups
• C. Imposing strict regulations on new business entry
• D. Banning all forms of intellectual property protection

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of externalities, which are costs or benefits that affect third parties not directly involved in an economic transaction. Positive externalities, such as innovation, often lead to benefits beyond the innovator.
2. Step 2: Recognize that entrepreneurship, especially in innovative startups, often generates positive externalities by creating new products, technologies, or processes that benefit society.
3. Step 3: Analyze how different public policies impact entrepreneurship: subsidies for research and development (R&D) lower the cost of innovation and encourage more entrepreneurial activity; increasing taxes on startups raises their costs and may discourage innovation; strict regulations can create barriers to entry, limiting new businesses; banning intellectual property protection removes incentives for innovation by reducing potential rewards.
4. Step 4: Conclude that policies providing subsidies for R&D directly support positive externalities by encouraging innovation and entrepreneurship, making it the most likely policy to foster entrepreneurship.
5. Step 5: Summarize that fostering entrepreneurship through positive externalities involves reducing costs and increasing incentives for innovation, which subsidies achieve effectively compared to the other options.