Question

Briefly explain what would happen if parties imposing a negative externality on others had to take the board social cost into account.

Answer 1

ANSWER: A negative externality occurs when a firm or an individual is making a decision does not bear the full cost of the decision. When good has a negative externality, then the cost to society exceeds the cost consumer is paying for it. In the case of a negative externality, the third party is suffering from the economic transaction between a buyer and a seller, however they are not been paid for these costs. Thus when the parties imposing a negative externality had to take the broader social cost of their behavior into account, they would have an incentive to decrease the production of whatever is causing the negative externality