Question

Describe three ways a government might respond to a negative externality.

Answer 1

First of all the term negative externality is defined as the loss suffered by someone/third party due to the transaction/exchange of goods between two person.

Here the two person exchanging the goods/selling or purchasing the goods are seller and purchaser. The third party here is any external organisation,individual,government etc related to such exchange between producer and consumer.

Now, the government might respond to such negative externality by :

• Providing extra tax regulations for such negative externalities.
• Extendingrights to resources producing such negative externalities.
• Takingdirect controls and providing regulations to the transactions made by producer and consumer.
• Providingsubsidies to reduce negative externalities.
• Makingpermits to use resources which are generating negative externalities.