2024 · Q35
Which one of the following statements is not correct?
General KnowledgeIndian Economy
- AThe market mechanism overproduces a good that generates positive externality.
- BA cap and trade of pollution permits can be used by the government to achieve the social optimum.
- CThe optimal amount of subsidy in the case of an activity that produces a positive externality is the difference between the social benefit and the private benefit at the optimum.
- DTragedy of Commons is an example of negative externality.
Explanation
Statement (A) is not correct: a good that generates a positive externality is underproduced by the market, not overproduced, because producers ignore the external social benefit. Statement (B) is correct — cap and trade can achieve the social optimum; (C) is correct — the optimal subsidy equals the gap between social and private benefit at the optimum; and (D) is correct — the tragedy of the commons is a negative externality. The statement that is not correct is (A).