Externalities involve the imposition of costs or benefits on parties outside an activity or transaction.

If the government reduces spending ________

A) the IS curve will shift to the right B) output will increase if interest rates remain fixed C) consumption will increase D) all of the above E) none of the above

If a pollution tax imposed on a firm is greater than its external cost:

A. the externality will be fully internalized. B. the social production cost will increase by the amount of the pollution tax. C. the pollution tax will be efficient. D. from a society's point of view, the firm will be producing too little.