Question

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 its production affects other people negatively. For example, when I drive a car, it causes pollution which affects everyone while its only me who gets the benefit of reaching whereever i was going in my car.

Two possible solutions to negative externality-

• Stricter regulations- Government can put stricter regulations on any factories/vehicles that cause pollutions. Lower polluting chemicals, more efficient machines etc are all such measures that can be taken.
• Forced reductions- Ther government can set limits on production of pollutants and can force factories to reduce it. For example, the government can bring lesiglation that no factory will produce more than 10 tons of CO2 per week.

Economic reason- Lower market efficiency when pushed. All industries, in an ideal environment, operate on a principle of maximizing total surplus. This surplus is usually maximized when costs are lower and profits are higher. When a government enforces restrictions/regulations, it increases the costs for the company. Increasing costs force the company to find a new surplus maximizing situation. That can include cutting costs somewhere else (laying off workers), shifting to where there are less regulations (developing countries) etc. All these result in a great loss to the government and public. Hence the government needs to balance the loss by restrictions to hazard because of pollution. Often times the loss because of stricter regulations is higher than the hazard by pollutions and these measures fail.