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    How a Government Handles Externalities

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    Can anyone help me for the below question?

    Discuss the various ways governments can handle externalities, such as noise from a local airport or a barking dog or building of commercial office space or an industrial building in a residential area? How does the assignment of property rights affect the outcome? Under what circumstances would a socially optimal solution arise without any government intervention? Under what circumstances would government intervention likely move the outcome closer to a socially optimal solution?

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    Solution Preview

    Hi,
    This is basic economics and a theory found in most neoclassical textbooks - the theory of externalities. Basically, that an activity creates consequences external to the actor that is undertaking the activity, for which he/she doesn't see the consequence. The textbook examples often include pollution or, as in your question, noise/clutter. Theoretically, this is expressed as the social cost of the activity being greater than the individual's cost - and the way that these two costs can be put in line is via government intervention. In this way, government can increase the cost ...

    Solution Summary

    This answer tackles the issue of externalities, including the economic rationale behind the concept and the various policy prescriptions that may mitigate the difficulties.

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