Question

V. Describe a command-control policy option to correct the externality. vi. Describe an incentive policy option to correct the externality.

I need help on v and vi please

Answer 1

v. The command and control policy options come in the form of government imposed standards, targets, process requirements, or outright banning the product.In this case the government can impose fine on the companies producing a product which is more than its socially efficient level of output.

vi. Imposition on Pigouvian taxes on company is an example of incentive policy option to correct the externality. This is because imposition of taxes increase the cost of production of the good which incentivize economic actors to reduce the production of goods or services generating negative externalities. The tax is equal to the marginal damage imposed on the society due to negative externality and this moves the equilibrium closer to the socially optimum level.