Question

If you choose to write about a negative externality such as pollution, what do you think is the best way to reduce pollution? Please explain. If choose to write about a positive externality, what is the economic problem that positive externalities create? Please explain.

Answer 1

Negative externality is a phenomenon when parties not involved in the production activities suffer from it. For example, a company producing goods and creating pollution, negatively affects the community as a whole, though the community does not buy goods. It happens when firms work on private cost and increase production at lower cost. It leads to problems such as pollution. It creates one of the case of market failure.

To correct the problem of negative externality, the government should apply a combination of methods to reduce the pollution. The first method is to apply the tax that should be for a short term period, because firms cannot invest capital to become more pollution efficient. The tax will increase the price and consumption will decrease. It will help achieve the socially optimal equilibrium. For long term solution, the government should apply cap and trade system where the firms can sell their units of permit and earn money by using clean and green technology. It will help promote the clean and green technology that will benefit all the stakeholders.  So, both the methods should be used to reduce the pollution.