Question

In which of these situations does it make sense to say economics predicts people will not internalize an externality, like pollution? (1 point) When the transaction costs of trading in rights to the pollution are higher than the costs of putting up with the pollution When they do not care about the pollution as much as they should When governments do not tax the pollution When the externality is actually positive - unlike pollution People will always internalize an externality

Answer 1

1. Option C.

• One of the most efficient way to internalize an externality is by taxing the right to pollute.
• But when the government does not tax these externalities, the actor's who were responsible will not take the responsibility of the consequences or the pollution affect created by them.
• This will prevent people from internalizing the externalities.

2. Option C

• Giving the firm's permits to pollute a certain amount and letting them buy and sell their unused pollution permits is the most efficient way of solving a pollution problem.
• These permits encourages the firm's to pollute less and also allow these permits to be sold if there are excess.