Which of the following best describes an official ban on trade or other commercial activity with a particular country as a public solution to externalities?

• A. Embargo
• B. Pigovian tax
• C. Tradable permit
• D. Subsidy

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 a transaction.
2. Step 2: Recognize that public solutions to externalities aim to correct market failures by either discouraging negative externalities or encouraging positive ones.
3. Step 3: Identify that a Pigovian tax is a tax imposed to internalize negative externalities by making the private cost equal to the social cost.
4. Step 4: Know that a tradable permit system allows firms to buy and sell rights to pollute, effectively limiting total pollution through market mechanisms.
5. Step 5: Understand that an embargo is an official ban on trade or commercial activity with a particular country, often used as a political or economic sanction rather than a direct economic instrument to correct externalities.