This article throws light upon the top three policies taken by government that will correct negative externalities. The policies are: 1. Taxation 2. Subsides 3. Regulation. Type # 1. Taxation: Corrective taxation of negative externality, forces market participants to account for the opportunity costs of all resources allocated in private market. Consider the case of a rubber processing industry in [...]
Welfare economics is the study of efficiency and equity of resource allocation. Allocative efficiency is the point at which allocations maximize total net benefits of society. Pareto efficiency or optimality is another way to measure efficiency. Developed by Vilfredo Pareto, (1848 - 1923) Pareto efficient allocation of goods occur when no other possible allocation makes at least one individual better [...]
In this article we will discuss about how negative externality becomes a source of economic inefficiency. Suppose John an ambitious rock musician, resort to the practice of playing electronic guitar, every day for five hours in his house. However John’s immediate neighbor, Peter does not enjoy listing to the ear-storming guitar notes. The practice time of John differs from socially [...]