Question

Tell an example of an externality that the government does not try to correct (e.g., if I spit on the forest trail, there is no regulation/punishment/tax for spitting, even though it may produce a negative externality for somebody who will be grossed out by the sight or step into it). Why does the government let this externality (the externality you are giving an example of, not the spitting one I give as an example) go on? (hint: there is a regulation/punishment/fine if I spit in a shopping mall, unlike the forest.)

Answer 1

Government sometimes does not restrict the building up of a factory near a locality or building up of a locality near factory . We often see factory workers settling down near the factory which has a negative externality on them but that is not prohibited or regulated in every case . This is because there are certain costs associated with regulations . Workers settling down near by causes ease of work and saves transport cost , also saves time for commutation . Strict regulations will firstly be expensive to implement , will discourage new start up industries . Workers will demand more wages if not allowed to stay nearby . This is will raise production cost and wastage of resources . Hence this externality is allowed in some areas . But near factories which produce harmful chemicals or such factories which produce toxic fumes , the regulation is implemented .