Legislation limiting specific activities is the most direct method of addressing which market situation?

Question

BlackTom AI · Accepted Answer

Let's break down what each option implies about market failures and the policy tools used to address them.
Option 1: 'Monopoly control' suggests government action targets monopolies, often through antitrust enforcement or regulation of prices and output. While regulation can address monopoly issues, legislation limiting specific activities is not the most direct method for monopolistic problems, which relate more to market power than to external costs or benefits.
Option 2: 'Negative externalities' refers to situations where a market activity imposes costs on third parties not reflected in prices. When this occurs, targeted legislation restricting specific activities can directly reduce those external harms, making it a direct policy tool for this scenario.
Option 3: 'Excessive demand' describes demand-side pressure that may lead to shortages or price spikes. While regulation could influence demand in some contexts, limiting specific activities is not the most direct or general approach to addressing excessive demand, which often involves price controls, taxes, or supply interventions rather than activity bans.
Option 4: 'Positive externalities' involve benefits enjoyed by others from an activity. Legislation that limits activities would generally worsen or fail to promote these benefits, so it would be an inappropriate or counterproductive tool for positive externalities.
In summary, the core idea behind using legislation to limit certain activities is to curb unintended costs imposed on others, which aligns most closely with addressing negative externalities. The other options describe different market failures or policy directions that are not as directly addressed by restricting activities.

Legislation limiting specific activities is the most direct method of addressing which market situation?

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