Question

Briefly explain what would happen if parties imposing a negative externality on others had to take the board social cost into

Answer 1

Answer- In the case of negative externality the negative impact of the economic transaction falls on the third oarty and thus it is the jib of the producers or consumers to tak steps to curb such negativity caused. If they are nit able to do something then the government intervenes and thus takes the necessary steps. The government might impose taxes on the polluting parties or make some rules and regulations.

If the government plans to impose a social cost on the firms or parties because if which negative externality is speead then it would affect the firms production level. The rise in tax will shift the supply curve of the producer to the left hand side and thus the quantity supplied will fall. Due to rise in production costs because of high taxes the prices of the goods and services supplied will also increase. Consumers may not want to buy such high priced products if the elasticity of demand is high. This will force the firms to cut the quantity supplied and the negative externality caused due to pollution soread from production of such goods would reduce.

The government must assess the difference between the marginal social curve and the marginal private cost curve. This will make the equilibrium level at the socially optimum level.