Question

What is a negative externality? Give an example of a negative externality. How can government “correct” the market failure due to negative externalities? Explain your answer below in no more than four sentences.

Answer 1

Negative externality is nothing but due to the action of one party the third party has to bear the social cost of it because there is a loss or cost occuring for the third party this is a negative externality and not a positive externality. One famous example for negative externality is pollution where the the third party of the people be the cost due to damages caused by the pollution. The government can correct the negative externality by taxation where the negative externality can be taxed so that the supply curve shift to the left and the output level will be in such a way that the social benefit will be equal to that of social cost and private benefits are not in play