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How to deal with negative externalities - pollution

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Sometimes market activities (production, buying and selling) have unintended positive or negative effects outside the markets scope. This is called an Externality. Suppose that you are a policy maker concerned with correcting the effects of gases and particulates emitted by and local power plant. What tools would you use? What would be the benefits of the action? What would be the costs? How would you decide what was the best level of emission reduction? Why do you think your approach would be better than others? hide problem

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Solution Summary

An explanation of what to do to deal with negative externalities, like pollution, to reach an efficient outcome.

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This is a complicated matter. According to the Coase Theorem, without transaction costs, such situation would be resolved by giving rights to either party, the most economically efficient outcome would result. If the polluter has rights and they have an effect on others that outweights the benefits to the polluter, they just have to pay him to stop. Only if his benefit is higher ...

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