Question

Suppose coal-burning firms are emitting excessive pollution into the air. Suggest two ways the government can deal with market failure.

Answer 1

The following two ways can be adopted by the government to address the market failure:

1) The government can set a ceiling of maximum allowable emission for any firm beyond which the firm has to pay a prohibitively high amount of fine per unit of emission to the government.

2) The government can set a ceiling of maximum allowable emission by the entire economy and sell the right to pollution to individual firms who can emit according to the amount of permit bought.