Question

Give three ways in which the government can intervene and solve for spillover costs.

Answer 1

Spillover cost," also known as "negative externality," is a term used to describe some loss or damage that a market transaction causes a third party. The third party ends up paying for the transaction in some way, even though it was neither the buyer nor the seller and had no part in the original decision.Examples Spillover costs can also apply to the actions of individuals, such as when a smoker exposes nonsmokers to secondhand smoke at a restaurant. Another common example is Pollution.

Solutions

1. Defining property rights
The stricter definition of property rights can limit the influence of economic activities on unrelated parties. However, it is not always a viable option since the ownership of particular things such as air or water cannot be unambiguously assigned to a particular agent.

2. Taxes
A government may impose taxes on goods or services that create externalities. The taxes would discourage activities that impose costs on unrelated parties.

3. Enforcement of Strict Laws.

Strict laws should be made for negative externalities. This may include fine and even imprisonment in extreme cases.