Question

How does air pollution regulation applying economic principles address the over-production levels that create an adverse third party impact?

Answer 1

Air pollution has negative externalities because of which third parties are affected. In case of negative externalities, production level is higher than the socially optimal level of production. This is because in case of negative externalities, the private cost of production is lower than the social cost of production. Regulation authorities impose fine or taxes or other costs on producers to increase the private cost so that private costs equals social costs of production. When private cost equals the social cost of production, production takes place at the socially optimal level. This results in optimum pollution level.