Which of the following is something the federal government is generally forbidden to do when addressing externalities?

• A. Regulate pollution through emission standards
• B. Impose taxes without legal authority
• C. Subsidize research into clean technologies
• D. Create tradable permits for carbon emissions

Answer: (B)

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. Governments often intervene to correct these market failures.
2. Step 2: Recognize common government interventions for externalities, such as regulating pollution through emission standards, subsidizing research, and creating tradable permits. These are typical and legally supported actions.
3. Step 3: Identify the legal framework that governs government actions. The federal government must have explicit legal authority to impose taxes; without this authority, imposing taxes is forbidden.
4. Step 4: Analyze each option in the problem: regulating pollution, subsidizing research, and creating tradable permits are generally within government powers, while imposing taxes without legal authority is not allowed.
5. Step 5: Conclude that the federal government is generally forbidden to impose taxes without legal authority when addressing externalities, as taxation requires explicit legislative approval.