Question

Analyze the role of the government with an exteranlity present.

Answer 1

There are four types of externality

1. Positive consumption externality : Here it is a good or service will has a positive externality when consumed. To encourage that the government will impose policy that will help shift the demand to the right to increase consumption, like reducing consumer tax.

2. Negative Consumption Externality: This is when onsumption increases cost to the society. To redue the government will impose consumer tax on such goods and services.

3. Positive production externality: This is similar to the first one, but it is when a production causes the benefit. The governement will impose subsidy on producers to increase production

4. Negative production externality : This is when the production of a good causes the external cost. The governemnt will impose taxes on producers to reduce production.

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