Answer to Question #67247 in Microeconomics for Esther muema

Question #67247
Define the concept of externalities and explain four remedies to negative externalities?
Expert's answer
Externalities exist when actions of economic units creates benefits and/or costs to third party, where the latter is a not direct par­ticipant.

Sale of Pollution Rights:
When producers pollute the environment, the government may auction off pollution rights. Auc-tion of pollution license by the government will lead to competition among the producers (i.e., the buy¬ers) so price of license will increase as also the costs to the firms. To avoid this cost, the firms may try to check pollution in advance in their own interests.

The government can regulate external disecono¬mies by passing laws. Scooter accidents often cause a lot damages to scooterists (and public). To reduce these damages, the government may make (and does make) wearing helmets a must for the scooterists.

Voluntary Payment:
By this method external diseconomies can be avoided if the parties creating them voluntarily pay to those who are suffering from diseconomies.

The government may circulate directives stressing the need to keep the environment clean. The problem is that directives are not binding; hence they are often ignored.

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