Question

List three examples of possible solutions to “negative” externalities. What was the externality, what caused it and what was the remedy. Was the remedy successful?

Answer 1

Negative externalities happens when the consumption or production of a good causes a harmful effect to a third party. For example

-Producing chemicals and causing pollution as a side effect by a factory owner, will affect local fishermen as will not be able to catch fish. This loss of income will be the negative externality. Moreover will also erode the quality of life. Government should intervene to create regulations and encourage and educate markets to work towards helping solve environmental problems, thus resolving the negative externality.

--Smoking causes health problems in people other than consumer. A pigouvian tax should be implemented by the government for discouraging consumers from purchasing more of this good. Also educate the consumers about it's ill-effects thus providing a successful remedy

--If you play loud music at night your neighbour may lose sleep. The government regulation need to be imposed that music is not allowed late night, thus can help in resolving the issue