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Economic externality

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Discuss methods of government intervention to correct externalities generally, including the adverse consequences and why this example 'works' to improve efficiency.

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Solution Summary

Government intervention to correct for externalities in the form of quota, tax and licenses will improve firms' efficiency since they are taking these cost into their production decision. Economy at large will benefits through less negative externalities as well as through improvement in efficiency. Resources are optimally allocated in the economy.

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There are positive as well as negative externalities. Positive externality is good for public. It is unintended benefits received by third parties (public) as a result of commercial activities. For example, when a firm built road for transporting its products, people who live in the vicinity will receive the benefit of the road as well.

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