Consider a competitive market for steel. The production process in the market for steel generates a negative externality (pollution of the environment). If left alone, how will the market price and output of that product compare with their values under conditions of ideal economic efficiency?

Select one:
A. The price will be too low and there will be too much output.
B. The price will be too high and there will be too much output.
C. The price will be too high and there will be not enough output.
D. The price will be too low and there will be too much output.

Taxing polluters can reduce pollution and align market outcomes with ideal economic efficiency, while domestic policies offer direct solutions to local pollution issues, potentially improving national welfare. Domestic policies can sometimes be superior to trade policies in reducing pollution effectively.

Explanation:

Trade tax or subsidy policy: Implementing a tax on polluters in a market economy can reduce pollution by increasing production costs, leading to lower output and an increase in product price. This tax helps capture the negative externality and move the market closer to ideal economic efficiency.

Purely domestic policy: A domestic policy could involve regulations or taxes imposed solely within the country to reduce pollution, aiming to lower social costs and improve national welfare.

Advantages of purely domestic policy over trade policy: A purely domestic policy may be more effective in addressing pollution as it directly targets local sources of pollution without relying on international agreements or cooperation.

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