Question

Q- We have discussed the topic “Rationale of Regulations “ in which we talked about the reasons for having regulations in a given country. Rationale of Regulations including issues of monopoly, windfall profits, externalities, social policy, information inadequacies, continuity and availability of services, anti-competitive behavior and predatory pricing, public goods and moral hazard, unequal bargaining power, scarcity and distribution of wealth, rationalization and coordination, and planning.

Examine only one of the above Rationale of Regulations by providing a definition, an example, and a discussion of the role of regulation in solving or controlling the problem.

Answer 1

Externalities

Externality is the cost or benefit affected by the third party who has not choose to afford the coat or benefit... There are different types of externalities.. .

Positive ( create benefits to the society) and Negative externalities ( make cost to the society)

For example : production activities of a factory can create both externalities ..the establishment of a factory will provide employment opportunities to the neighbors, and surrounding individuals... And also provide some infrastructure facilities also... That's are known as positive externalities... On the other hand manufacturing activities create pollution in the economy... It adversely affect the health conditions of the society. This is called negative externalities .

If a factory produces more without considering environment cost or pollution cost, the government can regulate them by imposing tax on their pollution emission... That is factory can release pollution up to certain limit after that they should give tax to the government... It is also known as piguvion tax. The government plays an important role in the case of negative externalities... In order to protect the life of the people and to ensure social welfare, government should control such problems in the economy...