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Externalities from an Economic Perspective

Externalities - is a cost or benefit experienced by a third party to a resource transfer. Discuss the following:
a) An externality problem is a problem of incomplete information, since profits fail to accurately report gains and losses to society, True or false? elaborate
b) How can the government intervene to make society better from the effects of externalities?
c) Distinguish between positive and negative externalities and give examples
d) Are federal mandates effective in regulating or correcting externalities, and are they good for society as a whole. Give examples

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a. Yes, this is essentially true. The message that is conveyed to a company which garners profits is that its enterprise is valuable to society. This is "information." The information is wrong if society would really be better off with less of whatever the company is producing. Likewise a company losing money will receive the message that it needs to change industries, when in fact it may simply be that the market is failing to recognize its importance.

b. The government can fix externalities in several ways. In the case of negative externalities, the government needs to reduce production. This can involve simply imposing a production limit. The market will respond to this with increasing the price of the little that can be produced. It can result in black market activity. The government could also tax the good, so that customers are forced to reduce their consumption. It could also restrict the number of companies through ...

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