In each of the following situations, explain how government intervention could improve society’s welfare by changing people’s incentives. In what sense is the market going wrong? (2-part answers)
a. Pollution from auto emissions has reached unhealthy levels.
Increase taxes on cars that produce more than the minimum for auto emissions.
The government could intervene by offering a financial incentive in the form of a tax rebate to those individuals who purchase a new, highly efficient automobile.