Question

1. Explain why pollution is considered a negative externality. Give two possible government solutions to the problem. Then give a possible economic reason why government might fail to resolve the problem.

Answer 1

Pollution is considered a negative externality because pollution emitted by a factory muddies the surrounding environment and effects the health of nearby residents. Pollution is a negative externality because its cost affects society as a whole.

Two important government solutions to the problem are:-

(1) Taxes :- Government can impose taxes on the goods causing this externality or say pollution. Pigouvian tax can be imposed. This tax is considered to be equal to the value of the negative externality.

(2) Implement Regulations :- Government can implemeneg regulations to offset the affects of externalities. Government can implement environmental regulations or health hazard legislation.

One possible economic reason why government might fail to resolve the problem is :- It is extremely difficult for the government to determine the appropriate level of tax. Moreover, in determining the tax level the government might come under pressure from various groups that would benefit from a higher or lower taxation levels.