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Market Activity: Emission Reduction

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Sometimes market activities (production, buying and selling) have unintended positive or negative effects outside the market's 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?

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Solution Summary

This solution discusses externalities from economic activity in approximately 450 words.

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An externality is a spill over from an economic activity. It is often referred to as a by-product of the market mechanism (supply equals demand). Negative externalities are often viewed as examples of market failure, in other words, the market mechanism creates a level of consumption / production that is higher than society desires.

A negative externality occurs when the by-product is viewed as having a social cost. For instance, when a car is driven it creates air pollution. This air pollution can have very harmful effects on other people. Interestingly, you - as an individual - do not account for this in the costs of driving, however society pays the costs of ...

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