Which of the following public policies is most effective for governments of developing countries to address negative externalities and promote entrepreneurship?

• A. Increase tariffs on imported goods to protect domestic industries
• B. Implement subsidies for clean technologies and enforce regulations to reduce pollution
• C. Raise taxes on small businesses to increase government revenue
• D. Eliminate all government intervention and allow markets to self-regulate

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of negative externalities, which occur when the social cost of a good or activity exceeds the private cost, leading to overproduction or overconsumption that harms third parties or the environment.
2. Step 2: Recognize that effective government policies to address negative externalities aim to internalize these external costs, either by discouraging harmful activities or encouraging cleaner alternatives.
3. Step 3: Evaluate the policy options: increasing tariffs protects domestic industries but does not directly address negative externalities; raising taxes on small businesses may hinder entrepreneurship and does not target pollution; eliminating government intervention ignores the externality problem.
4. Step 4: Understand why implementing subsidies for clean technologies and enforcing regulations is effective: subsidies lower the cost of adopting environmentally friendly technologies, encouraging businesses to reduce pollution, while regulations set standards that limit harmful activities.
5. Step 5: Conclude that combining subsidies and regulations aligns private incentives with social welfare, effectively reducing negative externalities and promoting entrepreneurship in developing countries.