Question

Consider the following event and identify which type of externality it creates:

“ …. Burning coal to produce energy”

In your answer you need to also explain whether the private market will overproduce or underproduce, and how government can intervene to correct the problem. Explain with the aid of an appropriate diagram.

Answer 1

this is a sort of negative externality and this is because of the fact that burning coal might produce energy but it actually e causes a lot of pollution and scarcity in the future as a result of which it is very important to understand that the private individuals are producing more than expected due to which the social cost is better third party with the effect of pollution. Therefore in order to correct this the government can intervene and create a tax such as pollution tax so that the supply reduces with which the supply curve shift to the left as a result of which the social marginal cost is equal to ooh marginal benefit as shown in the figure with which the supply is reduced.

Tan/Goul. Intervention AP Sy : Marginal Social cost Si priuate Margina b