Question

Explain why consumers would not be willing to pay full costs of a less polluting car in absence of government regulations.

Answer 1

The consumers' are unwillingness to pay full costs of a less polluting car because in the production of less polluting car there would be additional social cost which that are passed on to the buyer. Pollution is a negative externality. The consumers will pay an additional amount for the less polluting car however the benefits of cleaner air will be enjoyed by all the consumers. If a good has a positive externality, without a tax, there will be under-consumption because people are unwilling to pay for the external costs. Thus in absence of government regulations the consumers are unwilling to pay full costs of a less polluting car.